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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [Fee Required]
For the fiscal year ended DECEMBER 31, 1997
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [No fee required]
For the Transition period from ____________ to ___________
Commission File Number: 0-28424
CARDIOGENESIS CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 77-0352469
--------------------------------- ---------------------
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification No.)
540 OAKMEAD PARKWAY
SUNNYVALE, CALIFORNIA 94086
(Address of principal executive offices, including zip code)
(408) 328-8500
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $0.001 PAR VALUE PER SHARE
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K. [X]
The number of outstanding shares of Registrant's Common Stock on March
27, 1998 was 12,186,751 shares. The aggregate market value of the voting stock
held by non-affiliates of the Registrant, based upon the closing price of such
voting stock on March 27, 1998, as reported by the Nasdaq national market, was
approximately $31,067,000. Shares of Common Stock held by each executive officer
and director and by each entity affiliated with such persons have been excluded
from such calculation in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive determination
for other purposes.
DOCUMENTS INCORPORATED BY REFERENCE
Certain sections of the Registrant's definitive Proxy Statement for the
1998 Annual Stockholders Meeting to be held on June 2, 1998 are incorporated by
reference in Part III of this Form 10-K to the extent stated herein.
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FORM 10-K
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
PART I
ITEM 1. Business....................................................... 2
ITEM 2. Properties..................................................... 14
ITEM 3. Legal Proceedings.............................................. 14
ITEM 4. Submission of Matters to a Vote of Security Holders............ 15
PART II
ITEM 5. Market for Registrant's Common Equity and Related
Stockholder Matters.......................................... 15
ITEM 6. Selected Financial Data........................................ 16
ITEM 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................... 16
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk..... 26
ITEM 8. Financial Statements and Supplementary Data.................... 27
ITEM 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure..................................... 46
PART III
ITEM 10. Directors and Executives Officers of the Registrant............ 46
ITEM 11. Executive Compensation......................................... 46
ITEM 12. Security Ownership of Certain Beneficial Owners and
Management................................................... 46
ITEM 13. Certain Relationships and Related Transactions................. 46
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K...................................................... 46
SIGNATURES.................................................................. 50
</TABLE>
PART I
ITEM 1. BUSINESS
This Report contains forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended. These
forward-looking statements involve a number of risks and uncertainties,
including the factors described throughout this Report, particularly the section
entitled "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Risk Factors." The actual results the Company achieves
may differ materially from any forward-looking statements due to such risks and
uncertainties. The Company has identified by an asterisk (*) various sentences
within this Report which contain such forward-looking statements, and words such
as "believes,""anticipates," "expects," "intends" and similar expressions are
intended to identify forward-looking statements, but are not the exclusive means
of identifying such statements. The Company undertakes no obligation to revise
any forward-looking statements to reflect events or circumstances that may arise
after the date of this Report. Readers are urged to carefully review and
consider the various disclosures made by the Company in this Report that attempt
to advise interested parties of the risks and factors that may affect the
Company's business.
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GENERAL
CardioGenesis is developing proprietary probe and catheter systems to
perform both surgical and catheter-based percutaneous transmyocardial
revascularization ("TMR"). TMR is used to treat patients with severe coronary
artery disease ("CAD") who suffer from recurrent debilitating chest pain. Unlike
coronary artery bypass graft ("CABG") surgery and percutaneous transluminal
coronary angioplasty ("PTCA"), which are used to bypass, reopen or widen blocked
or narrowed arteries, TMR involves the use of laser energy, delivered through
probes and catheters, to create typically between 15 and 30 channels in the
ischemic oxygen-starved regions of the heart muscle. Clinical studies of TMR to
treat severe angina at some of the world's leading medical centers have
demonstrated improvements in clinical conditions and have reported reductions in
the frequency of repeated diagnostic procedures and hospitalizations. While the
mechanism of the potential clinical benefit of TMR is currently unproven, and
additional clinical and mechanism investigations are ongoing, the Company
believes the reported benefits of TMR are associated with angiogenesis, the
formation of new blood vessels.
The Company is currently developing three types of TMR systems, based
upon its patented technology, for use by cardiothoracic surgeons and
interventional cardiologists to treat patients with severe CAD. The Company's
intraoperative TMR ("ITMR(TM)") System and thoracoscopic TMR ("TTMR(TM)") System
use an epicardial approach (i.e., creating channels from outside the heart into
the left ventricle) and its percutaneous myocardial revascularization system
("PMR(TM)") uses an endocardial approach (i.e., creating channels from inside
the left ventricle partially through the myocardium).
The Company's objective is to establish TMR as a conventional therapy to
treat CAD and to become the worldwide market leader of TMR systems. *To
establish CardioGenesis as the leading provider of TMR systems, the Company
intends to continue to conduct clinical trials at, and focus its marketing
efforts on, high volume, prestigious cardiovascular centers. The Company's
clinical efforts have been focused on patients with severe angina for whom
existing therapies cannot be used (so-called "no-option" patients). *The Company
plans to conduct clinical trials to broaden the applications for its TMR systems
to cover multiple indications, including use as an adjunct to other
interventional therapies, such as CABG and PTCA. *The Company intends to build
upon its domestic and international intellectual property position, particularly
its issued percutaneous and intraoperative TMR method patents. *The Company
seeks to rapidly establish a large installed base of its TMR systems in key
international markets, emerging secondary markets, and, following U.S. Food and
Drug Administration ("FDA") approval, in the United States, thereby creating an
opportunity for a recurring revenue stream from the sale of its disposable
probes and catheters. To help achieve this goal, the Company has entered into an
exclusive international distribution agreement with Boston Scientific
Corporation ("BSC"), a worldwide leader in medical devices. *The Company
believes this agreement, which grants BSC exclusive rights and responsibilities
for sales and distribution of the full range of the Company's TMR products in
all international markets, is the approach needed to capitalize on the market
potential of TMR therapy and the Company's TMR probes and catheters.
*Additionally, the Company intends to invest significant resources to enhance
its understanding of the TMR mechanism to enable it to further develop its
products and to promote widespread adoption of TMR in the medical community.
CARDIOGENESIS TMR APPROACHES AND MARKETS
The Company's proprietary TMR systems are designed to create channels
either (i) epicardially (i.e., from outside the heart into the left ventricle)
or (ii) endocardially (i.e., from inside the left ventricle partially through
the myocardium). The Company's ITMR System and TTMR System use an epicardial
approach and its PMR System uses an endocardial approach.
ITMR. In an intraoperative TMR procedure, the heart is exposed by a
cardiothoracic surgeon through either a thoracotomy (an incision through the
chest wall) or a sternotomy (an incision through the sternum). The Company's
ITMR probe is then applied directly onto the myocardium delivering laser energy
to create channels into the left ventricle. The Company initiated Phase I
feasibility clinical trials with the ITMR System in "no-option" patients in
November 1995. In June 1996, the Company received approval from the FDA to
expand its multi-center ITMR clinical trial to a Phase II, prospective,
randomized clinical trial in "no-option" patients.
Enrollment in the Phase II, randomized, no-option trial is now complete.
The Company has commenced submission of data and information to the FDA on the
ITMR System. The Company plans to continue submitting information and updates to
the FDA throughout the next six to nine months and to respond to periodic
inquiries from the FDA with respect to review of such data and information. This
proactive and collaborative approach to submissions provides the Company with a
means for frequent reviews by the FDA of information required for Pre-Market
Release Approval ("PMA") as well as discussions regarding the ITMR System. See
"--Clinical Trials."
In August 1996, the Company received an Investigational Device Exemption
("IDE") from the FDA and has begun a clinical study of its ITMR system used as
an adjunctive therapy to CABG in patients with severe angina who are only
partially treatable by CABG. The adjunct to CABG clinical trial is on-going. See
"-- Clinical Trials."
PMR. The Company's percutaneous PMR System is designed to be used by an
interventional cardiologist in a cardiac catheterization laboratory. In this
procedure, the cardiologist accesses the heart by inserting a fiber optic
equipped catheter system into the femoral
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artery at the groin and then advancing it through the aorta into the left
ventricle. Once in the ventricle, the fiber optic catheter is guided to the
ischemic areas of the endocardial wall surface to create channels partially
through the wall of the heart. *The Company believes that PMR, as a
catheter-based procedure, is less invasive, less traumatic, and more
cost-effective than other TMR approaches. In November 1996, the Company
initiated clinical testing in Europe of its PMR System in "no-option" patients.
In July 1997, the Company received an IDE from the FDA which allows a
multi-center clinical trial of its PMR system to treat angina in no-option
patients at up to twelve clinical sites. The PMR clinical trials are on-going.
See "-- Clinical Trials."
TTMR. In a thoracoscopic TMR procedure, a TTMR probe is used by a
cardiothoracic surgeon in combination with endoscopic instruments to access and
visualize the heart. Through these endoscopic instruments, the TTMR probe is
maneuvered and placed on the beating heart delivering laser energy to create
channels into the left ventricle.
*The Company believes the approaches discussed above may be used for a
number of CAD indications. However, none of the Company's TMR systems has
received FDA approval, and there can be no assurance any of these approaches
will receive FDA approval for any of the indications discussed below or will be
accepted by the medical community as viable methods for the treatment of CAD.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Risk Factors -- No Assurance of Obtaining Required Regulatory
Approvals to Market Products in the United States; Significant Time Before
Submission of Any PMA."
POTENTIAL INDICATIONS
*The Company believes the three approaches it is developing could be
used to address a range of indications for TMR and estimates each year there are
more than 500,000 patients in the United States and other key markets who could
potentially benefit from TMR therapy.
"No-option." TMR is currently being studied as a treatment for patients
with severe CAD not treatable by PTCA, CABG or other interventional therapies.
These patients have severe diffuse multivessel CAD and may have undergone
multiple prior cardiac procedures. *The Company believes all of its TMR systems
could be used in the treatment of "no-option" patients.
Adjunct to CABG. TMR is also currently being studied in combination with
CABG, in cases where the patient has one or more areas of the heart afflicted by
severe CAD that cannot be adequately bypassed. In these cases, the coronary
arteries that can be bypassed are grafted, while other areas that are ischemic
and not suitable for bypass are treated with TMR. *The Company believes its ITMR
and TTMR Systems could address this potential indication.
Adjunct to PTCA. *The Company believes its proprietary PMR System may be
used in combination with a PTCA procedure, where there is evidence of severely
ischemic regions of the heart not amenable to treatment with PTCA alone. In this
situation, the Company's PMR System would be used to treat the regions of the
heart where PTCA is not effective.
No Company has yet received approval from the FDA to market TMR systems
in the United States for any indication. None of the Company's TMR systems has
been proven to be safe or efficacious nor has the Company received regulatory
approval to market any of its TMR systems in the United States. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Risk Factors -- Early Stage of Clinical Trials; No Assurance of
Safety or Efficacy" and "-- No Assurance of Obtaining Required Regulatory
Approvals to Market Products in the United States; Significant Time Before
Submission of Any PMA."
PRODUCTS
The Company's TMR systems include disposable fiber optic probes and
catheters for transmitting laser energy to the myocardium, a Holmium YAG
("Ho:YAG") laser unit, and an electrocardiogram ("ECG") monitor, which are
described below.
Disposable Fiber Optic Probes and Catheters. The proprietary probes used
in the Company's ITMR and TTMR Systems and the proprietary catheters used in the
Company's PMR System are flexible, fiber-optic based devices for positioning and
transmitting laser energy to create channels through the wall of the heart. The
tip of the probe includes a proprietary lens apparatus that creates laser energy
distribution to allow for progressive, controlled penetration of the myocardium.
A highly flexible optical fiber, encased within a protective fiber jacket,
transmits energy to the lens from the laser. The probes and catheters are
designed as
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disposable single-use devices. The PMR aligning catheter, with its coaxial
design, can be directed anywhere into the left ventricle. The catheter system
permits steering within the ventricle to guide the optical system to the
appropriate areas of the heart wall. Once the catheter system is oriented toward
the target to be treated, the lens is independently advanced to the ventricular
wall assuring perpendicular contact on the myocardial wall.
Ho:YAG Laser. The Company's TMR systems incorporate a proprietary Ho:YAG
laser specifically designed for TMR applications. The Company's current laser is
a portable unit, weighing approximately 140 pounds, which delivers laser energy.
*The Company believes the Ho:YAG laser is optimally suited for TMR procedures
because of (i) its tissue ablation characteristics; (ii) its ability to deliver
treatment energy through a fiber optic device, thereby allowing percutaneous
applications; (iii) its reliability when compared with other types of lasers;
and (iv) its ability to be manufactured cost-effectively.
ECG Monitor. The Company's TMR systems include a commercially available,
microprocessor-controlled ECG monitor and a Company proprietary software
algorithm. This ECG monitor provides the means for timing the firing of the
Company's laser to the patient's cardiac electrical activity. *Based on early
research sponsored by the Company and conducted at a major academic institution,
the Company believes timing the laser to the patient's cardiac electrical
activity may be a significant factor in minimizing the occurrence of arrhythmias
(irregular heartbeats).
The Company's TMR systems are designed to offer the following
advantages:
Flexible System Design. The Company's TMR systems are designed to
deliver laser energy in a progressive, controlled manner through a fiber optic
probe or catheter, providing the Company with a technology adaptable for
multiple approaches and indications.
Price/Performance. The Company has designed its TMR systems to be
cost-effective, enabling flexibility in the pricing of its laser systems and
disposable probes and catheters. *The Company believes that this flexibility
will enable it to offer superior price/performance to its customers.
Size and Portability. The Company's current TMR systems weigh
approximately 140 pounds, are portable and do not occupy a significant amount of
space in an operating room or cardiac catheterization laboratory.
Reliability. The Ho:YAG laser used in the Company's TMR systems is a
solid state laser designed for reliability, thereby minimizing maintenance
costs. The Company's TMR systems are also designed to meet and withstand the
rigors of shipment, installation, repeated use, and relocation within the
hospital environment.
In July 1996, the Company received the Conformite Europeene (CE) Mark
approval to market its ITMR System in the European Community. The CE Mark is
granted to companies whose products meet the essential requirements of the
European Medical Device Directive ("MDD") and provides the regulatory approval
necessary for commercialization in the European Community. In October 1996, at
the European Association of Cardio-Thoracic Surgery's annual meeting in Prague,
Czech Republic, the Company commercially launched the ITMR System in Europe.
In January 1998, the Company received the CE Mark approval for use of
its PMR system in the European Community. The Company is working closely with
BSC, as the Company's exclusive distributor in international markets to expand
the base of PMR sites and in preparing for the market launch of the System in
Europe and in other international markets.
The Company is not currently developing any products outside the field
of TMR. Consequently, the Company is dependent on the successful development and
commercialization of the Company's TMR systems. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Risk Factors --
Dependence on TMR Product Line; Rapid Technological Change."
MARKETING, SALES AND DISTRIBUTION
The Company's marketing strategy is designed to generate broad market
acceptance of the TMR procedure based on demonstrated clinical efficacy and
cost-effectiveness. The Company's strategy includes developing and maintaining
close working relationships with key cardiothoracic surgeons and interventional
cardiologists who practice at major cardiac care centers. *The Company seeks to
rapidly establish a large installed base of its TMR systems in key international
markets and emerging secondary markets thereby creating an opportunity for a
recurring revenue stream from the sale of its disposable probes and catheters.
*The Company expects that education and awareness of cardiothoracic
surgeons, interventional cardiologists and patients as to the benefits of the
Company's TMR systems will be a key component of its marketing and sales effort
for its TMR probe and catheter systems. *The Company currently supports and
intends to support rigorous clinical research designed to support the safety and
efficacy of its
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TMR systems. *In addition, to increase awareness of its TMR systems, the Company
has encouraged and intends to encourage the appropriate presentation of the
results of this research by the research investigators at major national and
international medical symposia and by the publication of clinical and scientific
reports of such results in major peer-reviewed publications.
*In the United States, the Company intends to market its products, if
approved by the FDA, with a direct sales organization. The Company has deployed
a U.S. sales force. However, additional resources will be required to develop a
sales force capable of effectively commercializing the Company's TMR systems in
the United States. Failure to build an effective sales and marketing
organization could have a material adverse effect on the Company's business,
financial condition and results of operations.
To effectively address the international markets, in 1996 the Company
entered into an exclusive international distribution agreement with BSC, a
worldwide leader in medical devices. *The Company believes this agreement, which
grants BSC exclusive rights and responsibilities for sales and distribution of
the full range of its TMR products in all international markets, is the approach
needed to capitalize on the market potential of TMR therapy and the Company's
TMR probes and catheters. *The Company believes this strategic relationship
should favorably position the Company in the increasingly competitive TMR
technology, sales and marketing environment and should help the Company to
address new marketing challenges.
Until such time, if ever, as the FDA approves the Company's TMR systems
for marketing in the United States, the Company anticipates it will continue to
derive its revenues primarily from BSC as the Company's exclusive international
distributor. The agreement with BSC does not allow the Company to control
international end-market prices and may not result in the same level of sales
and marketing efforts as would be the case using a direct sales force. BSC has
certain rights to terminate the agreement with the Company which, if exercised,
would require the Company to make alternative arrangements for the sale of its
products internationally, and which, if exercised, could have a material adverse
effect on the Company's business, financial condition and results of operations
for the foreseeable future. Even if FDA approval is obtained, the Company
expects international sales will continue to account for a significant portion
of the Company's total revenues. As a result, most of the Company's revenues
until such approval is obtained, and a significant portion of the Company's
revenues thereafter, will be subject to the risks associated with international
sales. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Risk Factors -- Reliance on a Third Party for All
International Sales" and "-- Need to Comply with International Government
Regulation."
CLINICAL TRIALS
ITMR. Clinical data from the Company's prospective randomized ITMR trial
presented at recent medical symposia indicate that patients who received
treatment with the ITMR System achieved approximately a two class drop in angina
class as measured on the Canadian Cardiovascular Society Angina Scale and a 45
percent improvement in exercise tolerance, as opposed to no improvement in
angina class or exercise tolerance in study patients who did not receive the
ITMR therapy. There are no reported operative deaths in the Company's randomized
study and the mortality rate in the ITMR therapy group is less than six percent.
Enrollment in the Phase II, randomized, no-option trial is now complete.
The Company has commenced submission of data and information to the FDA on its
ITMR System. The Company plans to continue submitting information and updates to
the FDA throughout the next six to nine months and to respond to periodic
inquiries from the FDA with respect to review of such data and information. This
proactive and collaborative approach to submissions provides the Company with a
means for frequent reviews by the FDA of information required for PMA as well as
discussions regarding the Company's ITMR System.
Adjunct to CABG. In August 1996, the Company launched an additional
prospective, randomized, multi-center clinical study under an FDA authorized IDE
to evaluate the ITMR therapy as an adjunct to CABG surgery in up to 500 patients
at up to 25 clinical sites.
PMR. Pilot clinical studies for the PMR System were first conducted in
Europe in November 1996 and the Company treated the first U.S. human patient in
July 1997. CardioGenesis was the first Company to initiate clinical studies of a
minimally invasive percutaneous approach to transmyocardial revascularization.
More than 100 patients have been treated with the PMR System at clinical
investigation centers in the U.S. and Europe. Clinical data presented at recent
medical symposia indicate patients treated with the PMR System are achieving
angina class reductions and exercise tolerance improvements comparable to those
achieved by patients treated with the ITMR System.
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*Due to the severity of the underlying illnesses of the patients in this
population, the Company expects the use of its TMR systems to be accompanied by
a certain level of patient morbidity and mortality. There can be no assurance
any clinical investigations the Company conducts will be completed or, if
completed, will provide sufficient safety and effectiveness data and information
to support a PMA application and to obtain FDA marketing approval. See "--
Government Regulation."
MANUFACTURING
General
The Company's manufacturing activities conducted at its facility in
Sunnyvale, California consist of assembly and testing of the fiber optic probe
and catheter systems used for the TMR procedures. The Company has developed
various proprietary processes used to manufacture its probes and catheters.
Recently, the Company's manufacturing activities have increased to support the
demand from commercial sales in Europe and to continue to provide probes and
catheters for use in the Company's clinical trials and laboratory testing. The
Company uses third party suppliers to manufacture the Ho:YAG laser and ECG
monitor included in its TMR systems and for other services and operations
including sterilization of its products.
The Company's facilities include a controlled environment room where
most assembly operations are performed. The Company has complied with various
international regulatory requirements including meeting ISO 9001/EN 46001 and
MDD requirements and has obtained a CE Mark approval to market both the ITMR
System and the PMR System in Europe. Before the FDA will approve a PMA
application, it will inspect the Company's manufacturing facilities and
processes for compliance with FDA regulations. The Company's manufacturing
facilities have not yet been inspected by the FDA. In the event additional
manufacturing sites are added or manufacturing processes are changed, such new
facilities and processes are also subject to regulatory inspection for
compliance with United States and international regulations. See "-- Government
Regulation."
Suppliers
A major component used in the Company's TMR systems, the ECG monitor, is
currently available from a sole source. In addition, several other components
used in the Company's TMR systems are purchased by the Company from a single
supplier. The Company periodically conducts assessments of alternative vendors
for various components used in its TMR systems. However, the qualification of
additional or replacement vendors for certain components is a lengthy process.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Risk Factors -- Dependence on Sole Suppliers," and "-- No
Assurance of Obtaining Required Regulatory Approvals to Market Products in the
United States; Significant Time Before Submission of Any PMA."
The Ho:YAG laser currently used in the Company's TMR systems is
manufactured by New Star Lasers ("New Star") pursuant to an OEM Supply
Agreement. Under the New Star OEM Agreement and related Research Development
Agreement, the Company has exclusive rights to sell or otherwise distribute the
laser on a worldwide basis either incorporated into the Company's products or on
a stand-alone basis. The New Star OEM Agreement prohibits the laser vendors from
selling or otherwise distributing the laser to any third party unless approved
in advance in writing by the Company. During the term of the New Star OEM
Agreement and for a period of one year thereafter, the laser vendors are
prohibited from making a laser, or any major subassembly of a laser, that is the
same as or functionally equivalent to the Company's laser for use competitive
with that of the Company. New Star has the exclusive right under the OEM
Agreement to manufacture and supply the laser to the Company, subject to the
right of the Company to obtain lasers from a second source under certain
circumstances.
Commencing in the fourth quarter 1997, the Company began purchasing
lasers from Carl Baasel Lasertechnik GmbH pursuant to an OEM Product Development
and Supply Agreement (the "Baasel OEM Agreement"). Under the Baasel OEM
Agreement, the Company has exclusive rights to sell or otherwise distribute the
laser on a worldwide basis either incorporated into the Company's products or on
a stand-alone basis. The Baasel OEM agreement prohibits Baasel from selling or
otherwise distributing the laser in the configuration developed for and used by
the Company's TMR systems to any third party unless approved in advance in
writing by the Company's TMR systems to any third party unless approved in
advance in writing by the Company. During the term of the Baasel OEM Agreement
and for a period of one year thereafter, the laser vendors are prohibited from
making a laser, or any major subassembly of a laser, that is the same or as
functionally equivalent to the Company's laser for use competitive with that of
the Company.
PATENTS AND PROPRIETARY RIGHTS
The Company relies on a combination of patent, trade secret, copyright
and trademark laws and contractual restrictions to establish and protect
proprietary rights in its TMR systems.
The Company holds six patents in the United States. One of the Company's
United States patents is directed to methods of PMR, in which a catheter system
is inserted through a patient's vascular system into the heart, and energy is
applied to the inner wall of the heart creating revascularization in the
myocardium. Two of the Company's United States patents are directed to methods
of ITMR
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and TTMR, where a flexible probe is inserted into a patient's chest cavity and
energy is applied to the outer wall of the heart creating revascularization
through the heart muscle. These patents expire in the year 2012. The Company
also has two patents, which expire in the year 2009, one directed to a
specialized lens and means for securing the lens to an optical fiber to provide
a desirable energy emission pattern and one of which is related to a system for
detecting broken optical fibers. The Company also has a patent which expires in
the year 2013 relating to a reinforced optical fiber system. The Company has
twenty United States patent applications pending and intends to file additional
patent applications on various features of its TMR systems in the future. The
Company has sixteen international patent applications pending and intends to
file additional international patent applications corresponding to most of the
pending United States patent applications. Several of the pending patent
applications have received Notices of Allowance, and the Company expects one or
more U.S. patents to issue. However, there can be no assurance additional
patents will issue with respect to any currently pending or future patent
application.
The medical device industry has been characterized by extensive
litigation regarding patents and other intellectual property rights, and some
companies in the medical device industry have employed intellectual property
litigation to attempt in whole or, in part, to gain a competitive advantage.
Certain of the Company's competitors and potential competitors have obtained
United States patents covering technology that could be used for certain TMR
procedures, and there can be no assurance such competitors, potential
competitors or others have not filed and do not hold international patents
covering other TMR technology. In February 1995, the Company received a letter
from PLC Medical Systems, Inc. ("PLC") advising the Company of the existence of
certain of PLC's patents, including one entitled Heart-Synchronized Pulsed Laser
System ("PLC Patent"). This letter requested an assessment by the Company of its
activities in this area. *The Company believes, based on its review of the PLC
Patent and opinions of counsel, that the Company's TMR systems do not infringe
such PLC Patent. In 1996, the Company initiated a suit against PLC seeking a
judgment that the PLC Patent is invalid and unenforceable. PLC has
counterclaimed against the Company for patent infringement. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -- Risk
Factors -- Risk of Infringement; Patents and Proprietary Technology."
RESEARCH AND DEVELOPMENT
The Company's research and development efforts to date have been focused
on development of the Company's ITMR, PMR and TTMR Systems. The Company is
committed to enhancing the medical community's knowledge and acceptance of TMR
for the treatment of severe angina. *The Company intends to continue its basic
research of the TMR mechanism and to focus on the expansion of the indications
and approaches for using its TMR systems, in particular its PMR System. *In
addition, the Company will continue to address improvements in the devices that
are a part of the TMR systems, including improvements which may reduce the cost
of its TMR systems. *Based on its research, the Company believes the reported
reduction in chest pain, improvement in exercise tolerance, and perceived
long-term increase in myocardial blood flow may be associated with the formation
of new blood vessels (angiogenesis). Further product research and development by
the Company will require substantial expenditures and has inherent risks, and
there can be no assurance the Company will be successful in identifying products
for which demand exists or in developing products that have the characteristics
necessary to treat particular indications, or that any new products introduced
by the Company will receive regulatory approval or be commercially successful.
Total research and development expenses of the Company were approximately $14.2
million, $7.1 million, and $4.0 million for the years ended December 31, 1997,
1996 and 1995, respectively.
Research and development work by the Company related to TMR is being
carried out at Columbia University ("Columbia") pursuant to an agreement that
has been extended into 1999. Under this agreement, the Company has a worldwide
exclusive license to any patents that issue in connection with the research
conducted. The license also includes a paid up, exclusive worldwide license to
use and disclose (subject to certain nondisclosure requirements) information,
data and know-how relating to the subject matter of the research and the
Company's products resulting from the research. The license may become
nonexclusive, at the election of Columbia, if the Company fails to use
reasonable efforts to develop and market the products resulting from the
research for commercial sale and distribution throughout the world. The license
also contains certain most-favored licensing provisions in the event that the
license becomes nonexclusive. The agreement provides for the payment of certain
royalties by the Company to Columbia based on its net revenues from products to
the extent such products include the patented technology developed by Columbia
under the agreement, including any sales made under an IDE. These royalties are
offset by funds advanced by the Company and prior sponsors to whom the Company
is a successor under the Columbia agreement to fund such research of Columbia.
The Company is not required to pay royalties to Columbia under the agreement
until certain conditions are met, and such conditions have not been met.
COMPETITION
Competition in the market for the treatment of CAD, in the medical
device industry generally, and in the TMR market in particular, is intense and
is expected to increase. The Company competes primarily with other developers
and manufacturers of TMR systems, including
8
<PAGE> 9
PLC, Eclipse Surgical Technologies, Inc. ("Eclipse"), and U.S. Surgical
Corporation ("U.S. Surgical"). Some of the Company's competitors and many of its
potential competitors have substantially greater name recognition and capital
resources than does the Company and also may have greater resources and
expertise in the areas of research and development, obtaining regulatory
approvals, manufacturing and marketing. The TMR market is characterized by rapid
technical innovation. There can be no assurance the Company's competitors will
not succeed in developing TMR products or procedures that are more effective or
more effectively marketed than products marketed by the Company or that render
the Company's technology obsolete. Additionally, even if the Company's products
provide performance comparable to competing products, there can be no assurance
the Company will be able to obtain necessary regulatory approvals to compete
against competitors in terms of manufacturing, marketing and sales. Certain
companies, including PLC and Eclipse, have completed enrollment in randomized
clinical trials of products and procedures involving TMR that compete with those
offered by the Company, and have received regulatory approvals in Europe to
begin commercially marketing their various TMR products. Earlier entrants in the
market in a therapeutic area often obtain and maintain greater market share than
later entrants.
*The Company believes the primary competitive factors in the market for
TMR systems include clinical performance, product safety and reliability,
availability of third-party reimbursement, product design specifically for TMR
use, product quality, ease of use, price of systems and disposable components,
customer service, and company reputation. In addition, the length of time
required for products to be developed and receive regulatory approval and the
ability to obtain, use and successfully enforce and defend patents or other
proprietary rights to prevent sales by competitors are also important
competitive factors. *The Company believes it competes favorably with respect to
these factors, although certain competitors are at a more advanced stage in the
clinical trial and regulatory approval processes. There can be no assurance the
Company will be able to continue to compete successfully in the future with
respect to any or all of the factors that are or may be relevant to success in
its markets.
Many of the medical indications that may be treatable with TMR are
currently being treated by drug therapies or surgery and other interventional
therapies, including CABG and PTCA. A number of these therapies are widely
accepted in the medical community, have a long history of use and continue to be
enhanced rapidly. There is no assurance that procedures using TMR will be able
to replace or augment such established treatments or that clinical research will
support the use of TMR. Additionally, new surgical procedures and new drug
therapies are being developed to treat CAD. These new procedures and drug
therapies could be more effective, safer or more cost-effective than TMR. The
inability of TMR to replace or augment existing therapies or to be more
effective, safer or more cost-effective than new therapies could have a material
adverse effect on the Company's business, financial condition and results of
operations.
GOVERNMENT REGULATION
United States
The Company's TMR systems and accessories are regulated in the United
States as medical devices. As such, the Company is subject to extensive
regulation by the FDA and state and local authorities including the California
Department of Health Services ("CDHS"). Pursuant to the Federal Food, Drug, and
Cosmetic Act ("FDC Act") and the regulations promulgated thereunder, the FDA
regulates the pre-clinical and clinical testing, manufacture, labeling,
distribution, sale, marketing, advertising and promotion of medical devices.
Noncompliance with applicable requirements can result in, among other things,
fines, injunctions, civil penalties, recall or seizure of products, total or
partial suspension of production, refusal of the government to grant PMA
approval under Section 515 of the FDC Act or premarket notification clearance
under Section 510(k) of the FDC Act ("510(k)"), withdrawal of marketing
clearances or approvals, a recommendation by the FDA that the Company not be
permitted to enter into government contracts and criminal prosecution. In
certain circumstances, the FDA also has the authority to order recall, repair,
replacement of or refund of the cost of, a device manufactured or distributed by
the Company. To date, none of the Company's products has been approved for sale
in the United States. FDA approval of a PMA for the relevant TMR system will be
required before such TMR system can be marketed in the United States.
In the United States, medical devices are classified as Class I, II or
III on the basis of the controls deemed by the FDA to be necessary to reasonably
assure their safety and effectiveness. Class I devices are subject to general
controls (e.g., labeling, premarket notification and adherence to FDA-mandated
current good manufacturing practice ("GMP") requirements), and Class II devices
are subject to general controls and special controls (e.g., performance
standards, postmarket surveillance, patient registries and FDA guidelines).
Generally, Class III devices are those that must receive premarket approval by
the FDA to assure their safety and effectiveness (e.g., life-sustaining,
life-supporting and implantable devices, or new devices which have been found
not to be substantially equivalent to legally marketed devices). Class III
devices usually require clinical testing and FDA approval prior to marketing and
distribution. The Company's TMR systems are Class III devices.
9
<PAGE> 10
Before a new medical device can be introduced into the market, the
manufacturer generally must obtain FDA clearance of a 510(k) or approval of a
PMA under Section 515 of the FDC Act. A PMA application is required if a
proposed device is not substantially equivalent to a legally marketed Class I or
Class II device, or if it is a Class III device for which the FDA has called for
PMAs. A PMA must be supported by valid scientific evidence that typically
includes extensive data, including biocompability data, preclinical study data
(e.g., bench testing, laboratory and animal studies) and clinical study data, to
demonstrate the safety and efficacy of the device. If human clinical trials of a
device are required and the device presents, in the FDA's view, a "significant
risk," the sponsor of the trial (usually the manufacturer or the distributor of
the device) is required to file an IDE application with the FDA prior to
commencing human clinical trials. The IDE application must be supported by data,
typically including the results of animal and laboratory testing. If the IDE
application is approved by the FDA and by one or more appropriate institutional
review boards ("IRBs"), human clinical trials may begin at a specific number of
investigational sites with a specific number of patients, as approved by the
FDA. If the sponsors and all reviewing IRBs conclude that the device presents a
"nonsignificant risk" to the patient, a sponsor may begin clinical trials after
obtaining approval for the study protocol by one or more of the appropriate
IRBs, without the need for FDA approval of the study protocol. Sponsors of
clinical trials are permitted under FDA regulations to sell devices distributed
in the course of the clinical study provided such compensation does not exceed
recovery of the costs of manufacture, research, development and handling. An IDE
supplement must be submitted to and approved by the FDA before a sponsor or an
investigator may make a change to the investigational plan that may affect its
scientific soundness or the rights, safety or welfare of human subjects. The FDA
has the authority to re-evaluate, alter, suspend or terminate clinical testing
based on its assessment of data collected throughout the trials.
The PMA must also contain a complete description of the device and its
components, and a detailed description of the methods, facilities and controls
used to manufacture the device. In addition, the submission must include the
proposed labeling, promotional labeling and materials concerning training
methods (if any). Upon submission of a PMA, the FDA makes a threshold
determination as to whether the application is sufficiently complete to permit
filing for a substantive review. If the FDA determines that the PMA application
is sufficiently complete to permit a substantive review, the FDA will accept the
application for filing. Once the submission is accepted for filing, the FDA
begins an in-depth review of the PMA. An FDA review of a PMA generally takes one
to three years from the date the PMA is accepted for filing, but may take
significantly longer if the FDA requests additional information and/or if any
major amendments to the PMA are filed. The review time is often significantly
extended by the FDA's requests asking for more information or clarification of
information already provided in the submission. During the review period, an
advisory committee, typically a panel of clinicians, will likely be convened by
the FDA to review and evaluate the application and provide recommendations to
the FDA as to whether the device should be approved. The FDA is not bound by the
recommendations of the advisory panel. Toward the end of the PMA review process,
the FDA generally will conduct an inspection of the manufacturer's facilities to
ensure that the facilities are in compliance with the applicable GMP
requirements and may also conduct a bioresearch monitoring inspection to ensure
the integrity and scientific validity of the clinical data.
If the FDA's evaluations of both the PMA and the manufacturing
facilities are favorable, the FDA will issue either an approval letter or an
"approvable letter" containing a number of conditions that must be met in order
to secure approval of the PMA. When and if those conditions have been fulfilled
to the satisfaction of the FDA, the agency will issue an order approving the
PMA, authorizing commercial marketing of the device for certain indications. If
the FDA's evaluation of the PMA or manufacturing facilities is not favorable,
the FDA will deny approval of the PMA or issue a "not approvable letter." The
FDA may also determine that additional pre-clinical or clinical trials are
necessary, in which case approval of the PMA could be delayed for up to several
years while additional pre-clinical or clinical trials are conducted and
submitted in an amendment to the PMA. The PMA process can be expensive,
uncertain and lengthy, and a number of devices for which FDA approval has been
sought by other companies have never been approved for marketing.
Any products manufactured or distributed by the Company pursuant to the
IDE or subsequent FDA clearances or approvals are subject to pervasive and
continuing regulatory oversight by the FDA, including record-keeping
requirements and reporting of adverse experiences with the use of the device.
Device manufacturers are required to register their establishments and list
their devices with the FDA and certain state agencies and are subject to
periodic inspections. The FDC Act requires medical devices be manufactured in
accordance with the FDA's current GMP regulations. These regulations require,
among other things, the manufacturing process be regulated and controlled by the
use of written procedures and the ability to produce devices which meet the
manufacturer's specifications be validated by extensive and detailed testing of
every aspect of the process. They also require investigation of any deficiencies
in the manufacturing process or in the products produced and detailed record
keeping. Manufacturing facilities are subject to FDA and CDHS inspection on a
periodic basis to monitor compliance with GMP requirements. If violations of the
10
<PAGE> 11
applicable regulations are noted during FDA and CDHS inspections of the
Company's, or its subcontractors' manufacturing facilities, the FDA and CDHS
can, among other things, prohibit further manufacturing, distribution and sale
of the Company's devices until the violations are cured. *The FDA has proposed
changes to the GMP regulations that will, among other things, require design
controls and maintenance of service records, which will likely increase the cost
of complying with GMP requirements. Other applicable requirements include the
FDA's medical device reporting regulation, which requires that the Company
provide information to the FDA on deaths or serious injuries alleged to have
been associated with the use of its marketed devices, as well as product
malfunctions that would likely cause or contribute to a death or serious injury
if the malfunction were to recur.
Labeling, advertising and promotion activities for investigational and
marketed devices are subject to scrutiny by the FDA and, in certain instances,
by the Federal Trade Commission. The FDA enforces statutory prohibitions against
promoting and marketing of products for unapproved uses. The Company and its
products are also subject to a variety of state laws and regulations in those
states or localities where its products are or will be marketed. Any applicable
state or local regulations may hinder the Company's ability to market its
products in those states or localities. The Company is also subject to numerous
federal, state and local laws relating to such matters as safe working
conditions, manufacturing practices, environmental protection, fire hazard
control and disposal of hazardous or potentially hazardous substances.
Compliance with such laws and regulations now or in the future could require
substantial expenditures by the Company.
Changes in existing requirements or interpretations (on which
regulations heavily depend) or adoption of new requirements or policies could
adversely affect the ability of the Company to comply with regulatory
requirements. Compliance with such laws and regulations now or in the future
could require substantial expenditures by the Company. Failure to comply with
regulatory requirements, or an increase in the cost of compliance, could have a
material adverse effect on the Company's business, financial condition and
results of operations.
In addition to the requirements for medical devices in general, the FDA
places additional regulations, in the form of performance standards, upon the
manufacture of medical laser products. The laser used in the Company's TMR
systems is self-certified by the manufacturer for conformity to these
performance standards. The Company is required to file with the FDA initial and
annual reports of production quantities with respect to its laser. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Risk Factors -- No Assurance of Obtaining Required Regulatory
Approvals to Market Products in the United States; Significant Time Before
Submission of Any PMA" and "-- Need to Comply with United States Manufacturing
Standards; Limited Manufacturing Experience."
International
For the Company to market its TMR systems in European and certain other
foreign countries, the Company must obtain certain regulatory approvals and
clearances and otherwise comply with extensive regulations regarding product
safety, manufacturing processes and quality. These regulations, including the
requirements for approvals or clearance to market and the time required for
regulatory review, vary from country to country. In July 1996, the Company
received CE Mark approval to market its ITMR System in the European Community.
The CE Mark is granted to companies whose products meet the essential
requirements of the European MDD and provides the regulatory approval necessary
for commercialization in Europe. In January 1998, the Company received the CE
Mark approval to market its PMR system in the European Community. *The Company
may rely in some circumstances on its exclusive international distributor, BSC,
for the receipt of premarket approvals and compliance with clinical trial
requirements in certain countries where the Company intends to market its TMR
products. Any enforcement action by regulatory authorities with respect to past
or future regulatory noncompliance could have a material adverse effect on the
Company's business, financial condition and results of operations.
The time required to obtain approval for sale in foreign countries may
be longer or shorter than that required for FDA approval for U.S. sales, and the
requirements may differ. In addition, there may be foreign regulatory barriers
other than premarket approval. The FDA must approve exports of devices that
require a PMA but are not yet approved domestically, unless they are approved
for sale by any member country of the European Union and the other "listed"
countries, including Australia, Canada, Israel, Japan, New Zealand, Switzerland
and South Africa, in which case they can be exported for sale to any country
without prior FDA approval. In addition, an unapproved device may be exported
without prior FDA approval to the listed countries for investigational use in
accordance with the laws of those countries. To obtain FDA export approval when
required, the Company must provide the FDA with data and information to
demonstrate that the device: (1) is not contrary to public health and safety;
and (2) has the approval of the country to which it is intended for export. To
allow the FDA to determine that export of a device is not contrary to public
health and safety, the
11
<PAGE> 12
Company is required to submit basic data regarding the safety of the device
unless the device is the subject of an FDA-approved IDE and it will be marketed
or used for clinical trials in the importing country for the same intended use,
or at least two IRBs in the United States have determined that the device is a
nonsignificant risk device and the device will be marketed or used for clinical
trials in the importing country for the same intended use. The Company also must
submit a letter to the FDA from the foreign country approving importation of the
device.
To sell its products within the European Economic Area ("EEA"),
consisting of the countries of the European Union and Norway and Iceland, the
Company is required to meet the requirements of the MDD and to affix the CE mark
on its products to attest to such compliance. To comply, the Company's products
must meet the "essential requirements," as defined under the MDD, relating to
safety and performance and the Company must successfully undergo verification of
its regulatory compliance ("conformity assessment") by a "notified body"
selected by the Company. Under MDD, the Company's TMR systems are in Class III,
the highest risk class, and therefore are subject to the most rigorous controls.
In addition to having to comply with the requirements of any particular country,
the authorities have the right under the MDD to prohibit a particular
investigation and impose specific conditions.
Since the Company obtained the CE Mark approval for its ITMR and PMR
systems, it is now subject to continued supervision by the notified body and
will be required to report any serious adverse incidents to the appropriate
authorities. The Company also will be required to comply with additional
national requirements that are outside the scope of the MDD. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -- Risk
Factors -- Need to Comply with International Government Regulation."
THIRD-PARTY REIMBURSEMENT
In the United States, hospitals, physicians and other health care
providers that purchase medical devices generally rely on third-party payors,
principally Medicare, Medicaid, private health insurance plans, health
maintenance organizations, and other sources of reimbursement for health care
costs ("Third-Party Payors"), to reimburse all or part of the cost of the
procedure in which the medical device is being used.
Third-party reimbursement has generally been available in the United
States for cardiovascular surgery and interventional cardiology procedures using
devices that have received FDA approval for marketing. *Although the Company
does not anticipate receiving reimbursements for its TMR Systems from Medicare
during its clinical trials, the Company does intend to seek reimbursement from
other Third-Party Payors. There can be no assurance, however, that such
reimbursement will be available. A failure by physicians to receive what they
consider to be adequate reimbursement for the TMR procedures in which the
Company's products are used could have a material adverse effect on the
Company's business, financial condition and results of operations. In addition,
failure to receive international reimbursement approvals could limit market
acceptance of the Company's products in the international markets in which such
approvals are sought which could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -- Risk
Factors -- Uncertain Availability of Third-Party Reimbursement."
PRODUCT LIABILITY AND INSURANCE
The Company's business exposes the Company to potential product
liability risks or product recalls inherent in the design, development,
manufacture and marketing of medical devices. The Company could be subject to
product liability claims in the event the use of the Company's TMR systems is
alleged to have caused adverse effects on a patient or such products are
believed to be defective. The Company's products are designed to be used in high
medical risk situations where there is a high risk of serious injury or death to
the patient. Such risks will continue to exist with respect to those products
that may in the future receive regulatory clearance for commercial sale. The
failure to comply with the FDA's GMP or other regulations could have a material
adverse effect on the ability of the Company to defend against product liability
lawsuits. Although the Company has not experienced any product liability claims
to date, any such claims could have a material adverse effect on the Company's
business, financial condition and results of operations. There can be no
assurance the Company's product liability insurance, with coverage limits of $5
million per occurrence and in the aggregate and additional coverage limits of
DM1 million (approximately $546,000) per person and DM50 million (approximately
$27,300,000) in the aggregate for the use of the Company's TMR systems in
Germany, will be adequate for any future product liability problems or that such
insurance coverage will continue to be available on commercially reasonable
terms or at all. Since TMR is not well understood and the lack of data regarding
the clinical safety and efficacy of the Company's TMR systems, there can be no
assurance such coverage limits would be adequate to protect the Company from
liabilities it might incur in connection with the development, manufacture and
sale of its products. In addition, the Company may require increased product
liability coverage if any products are commercialized. Product
12
<PAGE> 13
liability insurance is expensive and in the future may not be available to the
Company on terms acceptable to the Company, if at all. A successful product
liability claim or series of claims brought against the Company in excess of its
insurance coverage could have a material and adverse effect on the Company's
business, financial condition and results of operations.
EMPLOYEES
As of February 28, 1998, the Company had a total of 81 employees,
including 17 in research and development, 18 in operations, 14 in clinical and
regulatory affairs, 8 in quality assurance, 15 in sales and marketing and 9 in
finance and administration. In addition, the Company has consulting and other
contract arrangements. The Company believes the success of its business will
depend, in significant part, on its ability to attract and retain qualified
personnel. None of the Company's employees are represented by a collective
bargaining agreement and the Company has not experienced any work stoppage. The
Company considers its relations with its employees to be good. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -- Risk
Factors -- Dependence on Management, Other Key Personnel and Scientific
Advisors."
SCIENTIFIC ADVISORY BOARD
The Company has a Scientific Advisory Board consisting primarily of
leading physicians and scientists in the field of CAD. Scientific Advisory Board
members consult regularly with the engineers, physicians and scientists at the
Company and advise the Company on the specification and design of the Company's
products and clinical trials. The members of the Scientific Advisory Board are
prominent scholars in their field and, as a result, may serve as consultants to
a variety of companies. Because the members of the Company's Scientific Advisory
Board may have consulting or advisory positions with companies that may be
competitors of the Company, each member of the Scientific Advisory Board has
entered into a confidentiality arrangement with the Company. The Company
compensates certain members of its Scientific Advisory Board for participating
in meetings of the Board or for performing other services for the Company. The
Company's Scientific Advisory Board consists of:
<TABLE>
<CAPTION>
NAME OCCUPATION/TITLE
---- ----------------
<S> <C>
Robert W. Anderson, M.D. ............. David C. Sabiston Professor and
Chairman, Department of Surgery, Duke
University Medical Center
Daniel Burkhoff, M.D., Ph.D. ......... Director of Cardiac Physiology
Laboratory, Columbia Presbyterian
Medical Center; Assistant Professor of
Medicine, Columbia University
James L. Cox, M.D. ................... Evarts A. Graham Professor of Surgery,
Chief, Division of Cardiothoracic
Surgery, Washington University School of
Medicine
Pascal Goldschmidt, M.D., Ph.D. ...... Associate Professor of Medicine and Cell
Biology and Anatomy; Co-Director,
Ciccarone Center for the Prevention of
Heart Disease; Co-Director, Thrombosis
Center; Director, Bernard Vascular
Biology Laboratory; Johns Hopkins
University
Keith L. March, M.D., Ph.D. .......... Associate Professor of Medicine,
Krannert Institute of Cardiology,
Indiana University Medical Center
Craig R. Smith, M.D. ................. Chief, Division of Cardiothoracic
Surgery, Columbia Presbyterian Medical
Center; Associate Professor of Surgery,
Columbia University
Sharon Tomsen, M.D. .................. Associate Professor, Surgical Oncology
and Anatomic Pathology; Program
Director, Laser Biology Research
Program, University of Texas M.D.
Anderson Cancer Center; Adjunct
Associate Professor, Biomedical
Engineering Program, University of
Texas, Austin
</TABLE>
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<PAGE> 14
ITEM 2. PROPERTIES
The Company currently maintains its primary offices, research
laboratories and manufacturing and warehouse operations in a facility in
Sunnyvale, California having approximately 19,000 square feet of space. These
premises are leased pursuant to an agreement which expires in October 1999. *The
Company believes this facility will be adequate for its operations through at
least 1998, including anticipated manufacturing volume.
ITEM 3. LEGAL PROCEEDINGS
In September 1996, the Company filed an action for declaratory relief
against PLC Systems, Inc. of Canada and its wholly-owned U.S. subsidiary, PLC
Medical Systems, Inc., (collectively, "PLC"), seeking a judgment that PLC's
United States patent No. 5,125,926 (the "PLC Patent") to a certain
heart-synchronized pulsed laser system is not infringed, is invalid and
unenforceable. In the suit, filed in the United States District Court for the
Northern District of California, the Company also requested the Court to enter
judgment that the Company's Transmyocardial Revascularization (TMR) systems do
not infringe the PLC Patent. In October 1996, PLC responded to the complaint. In
its response, PLC took the position that the PLC Patent has been infringed by
the Company, but made no further claims. In September 1997, the Company filed an
amended complaint asking the Federal District Court to consider evidence of
inequitable conduct in the U.S. Patent Office while the PLC Patent was being
obtained by PLC. The amended complaint asserts that the PLC Patent is invalid
and unenforceable because material prior work of another party was withheld from
the Patent Office. Trial is set to begin January 11, 1999.
On February 9, 198, PLC submitted the Rudko Patent to the U.S. Patent
Office seeking reissue on the basis that the Rudko Patent as granted is "wholly
or partly inoperative or invalid."
In January 1997, the Company filed an Opposition to a European Patent
owned by PLC (the "European Patent") that is a counterpart to the PLC Patent.
The Opposition seeks to have the European Patent declared invalid. The Company
believes it has meritorious positions with respect to the invalidity of the
European Patent and intends to pursue the Opposition proceeding vigorously.
In September 1997, the Company was served with a complaint filed by PLC
in Munich, Germany alleging that CardioGenesis and its former German sales agent
have infringed EP 0 553 576, a European counterpart of the PLC Patent.
CardioGenesis has referred the complaint to patent counsel and is proceeding in
its defense on the basis of non-infringement.
The prosecution and defense of intellectual property suits and related
legal and administrative proceedings are costly and time consuming. The question
of patent infringement involves complex legal and factual issues and there can
be no assurance any conclusion reached by the Company regarding infringement
will be consistent with the resolution of any such issues by a court or
administrative body. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Risk Factors -- Risk of Infringement;
Patents and Proprietary Technology."
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<PAGE> 15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock has been included for quotation on the Nasdaq
National Market under the symbol "CGCP" since the Company's initial public
offering on May 21, 1996. The following table sets forth, for the periods
indicated, the range of high and low bid information for the Company's Common
stock as reported by Nasdaq:
<TABLE>
<CAPTION>
HIGH LOW
------ ------
1996
<S> <C> <C>
Second Quarter $23.25 $12.75
Third Quarter $15.00 $ 8.75
Fourth Quarter $15.00 $10.5156
1997
First Quarter $17.50 $11.25
Second Quarter $13.25 $ 7.25
Third Quarter $12.625 $ 9.625
Fourth Quarter $12.625 $ 5.00
</TABLE>
On March 27, 1998, there were approximately 88 holders of record of the
Company's Common Stock.
The Company has never declared or paid any cash dividends on its Common
Stock, and does not anticipate paying any cash dividends in the foreseeable
future.
15
<PAGE> 16
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
PERIOD FROM
SEPTEMBER 23,
1993 (DATE OF
INCEPTION) TO YEAR ENDED DECEMBER 31,
DECEMBER 31, ------------------------------------------------------
1993 1994 1995 1996 1997
------------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Sales
.......................................... $ 3,959 $ 7,559
Cost of sales .................................. 2,866 4,991
-------- --------
Gross profit ................................. 1,093 2,568
-------- --------
Operating expenses:
Research and development ..................... $ 85 $ 1,423 $ 3,967 7,140 14,210
General and administrative ................... 21 559 1,178 2,622 3,722
Sales and marketing .......................... -- -- 336 2,417 5,426
Write-off of acquired in-process
research and development ................... 750 -- -- -- --
-------- -------- -------- -------- --------
Operating expenses ....................... 856 1,982 5,481 12,179 23,358
-------- -------- -------- -------- --------
Operating loss ........................... (856) (1,982) (5,481) (11,086) (20,790)
Interest income, net............................ 3 198 182 2,286 2,819
-------- -------- -------- -------- --------
Net loss ................................. $ (853) $ (1,784) $ (5,299) $ (8,800) $(17,971)
======== ======== ======== ======== ========
Net loss per common share and per
common share -- assuming dilution(1).......... $ -- $ -- $ -- $ (1.18) $ (1.49)
======== ======== ======== ======== ========
Shares used in computing net loss per
common share and per common share
-- assuming dilution............. -- -- -- 7,427 12,029
======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------------------
1993 1994 1995 1996 1997
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash, cash equivalents and
available-for-sale securities .......... $ 1,113 $ 5,324 $ 14,036 $ 58,208 $ 40,535
Working capital .......................... 1,120 5,321 14,192 57,324 32,575
Total assets ............................. 1,127 5,885 16,223 64,297 48,240
Redeemable convertible preferred stock.... 1,979 8,457 22,390 -- --
Total stockholders' equity (deficit)...... (852) (2,636) (7,831) 61,395 44,146
</TABLE>
(1) Per share data has been restated to reflect the Company's adoption of
Statement of Financial Accounting Standards No. 128 "Earnings per Share"
and the Securities and Exchange Commission Staff Accounting Bulletin No. 98
effective December 31, 1997. For the years ended December 31, 1995 and 1994
and for the period ended December 31, 1993, the Company had 246, 0, and 0
shares of common stock outstanding. The Company does not believe the
earnings per share data for these periods are meaningful. See Note 1 of
Notes to Consolidated Financial Statements.
(2) The Company has not declared any cash dividends on its common stock since
its inception and does not anticipate paying cash dividends in the
forecoming future.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
Since its inception, CardioGenesis has been primarily engaged in the
design, development, and marketing of its transmyocardial revascularization
(TMR) systems. The Company has only a limited operating history and has
experienced significant operating losses since its inception. The Company
incurred a net loss of $18 million in 1997. The development and potential
commercialization of the Company's products will continue to require significant
research and development, regulatory, sales and marketing, manufacturing and
other expenditures. *Operating losses are expected to continue at least through
1999 as the Company continues to perform research and development, to fund
clinical trials in support of regulatory and reimbursement approvals, and to
expand its marketing and sales activities in the U.S. and internationally by
supporting BSC, the exclusive distributor in international markets. *There can
be no assurance that the Company's TMR systems will ever generate significant
revenues or the Company will achieve or sustain profitability.
The research, manufacture, sale and distribution of medical devices such
as the Company's TMR systems are subject to numerous regulations imposed by
governmental authorities, principally the FDA and corresponding state and
foreign agencies. The regulatory process is lengthy, expensive and uncertain.
FDA approval of a PMA application is required before any of the Company's TMR
systems can be marketed in the United States. Securing FDA approvals and
clearances will
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require submission to the FDA of extensive clinical data and technical
information. Also, many foreign governments and the European Union also have
review processes for medical devices. The Company has received CE Mark approval
to market its ITMR System and PMR System in the European Union. The CE Mark is
granted to companies whose products meet the essential requirements of the
European MDD and provides the regulatory approval necessary for
commercialization in Europe. The Company will be subject to continued
supervision by regulators and will be required to report any serious adverse
incidents to the appropriate authorities. The Company also will be required to
comply with additional national requirements that are outside the scope of the
MDD. *The Company plans to continue to seek regulatory approvals to allow for
marketing and distribution of its products in international markets.
The Company commenced clinical trials of its ITMR System in October 1995
and began clinical trials of its PMR System in November 1996. Clinical trials of
the Company's TTMR System have not commenced.
In July 1996, the Company began a Phase II clinical trial under an IDE
that allowed a prospective, randomized, multi-center clinical trial of its ITMR
System in "no-option" patients with severe CAD. Enrollment in the Phase II,
randomized, no-option trial is now complete. The Company has commenced
submission of data and information to the FDA on the Company's ITMR System. *The
Company plans to continue submitting information and updates to the FDA
throughout the next six to nine months and to respond to periodic inquiries from
the FDA with respect to review of such data and information. *This proactive and
collaborative approach to submissions provides the Company with a means for
frequent reviews by the FDA of information required for PMA as well as
discussions regarding the intraoperative ITMR System.
In August 1996, the Company received an IDE from the FDA and has begun a
major clinical study of its intraoperative ITMR System used as an adjunctive
therapy to CABG surgery in patients with severe angina who are only partially
treatable by CABG. The adjunct to CABG clinical trials are ongoing.
Clinical trials for the Company's PMR System commenced in Europe in
November 1996. In January 1998, the Company received the CE Mark approval for
use of its PMR System in the European community. In July 1997, the Company
received an IDE from the FDA which allows a multi-center clinical trial of the
PMR system to treat angina in no-option patients at up to twelve clinical sites
in the U.S. Enrollment for the U.S. clinical trial sites has begun and the
trials are ongoing. In addition to treating the first U.S. human patient on July
31, 1997, more than 100 human patients have been treated with the Company's PMR
system.
The Company recorded sales of $7.6 million in 1997 from sales of its
ITMR Systems, PMR Systems and disposable probes and catheters to its
international distributor, BSC, and to clinical trial sites in the U.S. The
Company recognizes product revenues upon shipment of its products to customers
and fulfillment of acceptance terms, if any, and when no significant contractual
obligations remain outstanding. Deferred revenue consists of shipments that have
been made which are subject to limited rights of return or other contingencies.
*The Company anticipates its revenues from product sales over the next several
years will be primarily derived from international sales by BSC. *As a result,
the revenue levels of the Company are and will be dependent on the efforts of
BSC. *Any such international sales will be subject to a number of risks,
including foreign currency fluctuations, economic or political instability,
foreign tax laws, shipping delays, various tariffs and trade regulations and
restrictions and foreign medical regulations, any of which could have a
material adverse impact on the Company's revenues.
* Results of the Company's operations have varied and are expected to
fluctuate significantly from quarter to quarter depending on numerous factors,
including: (i) reliance on BSC; (ii) demand for the Company's products, new
product introductions by the Company or its competitors or transitions to new
products; (iii) the timing of orders and shipments; (iv) the degree of
acceptance of TMR therapy by the medical community; (v) competition, including
pricing pressures; (vi) potential third-party patent infringement claims; (vii)
the timing of regulatory and third-party reimbursement approvals; (viii)
expansion of the Company's manufacturing capacity and the Company's ability to
manufacture its products efficiently; (ix) the timing of research and
development expenses, including clinical trial-related expenditures; and (x)
seasonal factors affecting the number of procedures performed. *Due to such
fluctuations in operating results, period-to-period comparisons of the Company's
operating results are not necessarily meaningful and should not be relied upon
as indicators of likely future performance.
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RESULTS OF OPERATIONS
Years Ended December 31, 1997, 1996, and 1995
Sales. Sales were recognized for the first time in 1996. Sales of the
Company's TMR systems for commercial use in Europe and for use at clinical trial
sites in both the U.S. and Europe totaled approximately $7.6 million and $4.0
million for the year ended December 31, 1997 and 1996, respectively. The
increase in sales from 1996 to 1997 is primarily due to the exclusive
international distribution agreement with BSC.
Cost of Sales. Cost of sales for the year ended December 31, 1997 was
approximately $5 million, or 66% of sales. Cost of sales for the year ended
December 31, 1996 was approximately $2.9 million, or 72% of sales. The decrease
in cost of sales as a percent of sales from 1996 to 1997 was primarily due to
the allocation of fixed overhead costs over more units. *However, no assurance
can be given that demand for the Company's products will grow sufficiently to
require increased levels of production.
Research and Development Expenses. Research and development expenses
increased $7.1 million to $14.2 million for 1997 from $7.1 million for 1996 and
increased $3.1 million in 1996 from $4.0 million for 1995. The increase from
1996 to 1997 was primarily due to increased activity in the clinical trials and
continued investment in research in the field of TMR. The increase from 1995 to
1996 was primarily due to expenses related to the initiation of three additional
clinical trials, two with the Company's ITMR System and one with the PMR System.
Also, the Company increased its investment in mechanism research in the field of
TMR. *The Company expects research and development expenses to continue to
increase throughout 1998 as the Company continues to enroll patients in its
ongoing clinical trials, initiates additional clinical trials, and continues to
invest in TMR mechanism research.
General and Administrative Expenses. General and administrative expenses
increased $1.1 million to $3.7 million for 1997 from $2.6 million for 1996 and
increased $1.4 million in 1996 from $1.2 million for 1995. The increase in 1997
was primarily due to increased finance and administration personnel costs to
support the Company's growth, increased legal fees associated with research and
development agreements and the exclusive international distribution agreement
with BSC, and legal fees related to the PLC litigation. The increase from 1995
to 1996 is primarily attributed to employee growth, legal fees relating to the
exclusive distribution agreement with BSC, legal fees associated with the
initiation of the suit by the Company against PLC, increased property, general
and product liability insurance costs, public and investor relations costs, and
the costs incurred to comply with the additional requirements associated with
being a public company. *The Company expects that its general and administrative
expenses will continue to increase in 1998.
Sales and Marketing Expenses. Sales and marketing expenses increased $3
million to $5.4 million for 1997 from $2.4 million for 1996 and increased $2.1
million in 1996 from $336,000 in 1995. The increase in 1997 was primarily due to
the addition of sales and marketing personnel and the implementation of
marketing and training programs, transition costs related to the BSC
international sales agreement, and continued costs associated with the launch of
the Company's TMR system in Europe. The increase from 1995 to 1996 is primarily
attributed to preparing for and launching the ITMR system in Europe, employee
growth, and the implementation of outreach programs at the clinical sites. *The
Company expects that sales and marketing expenses will continue to increase in
1998 as the Company expands clinical studies, conducts physician training, and
supports the sales and marketing activities of BSC.
Interest Income. Interest income increased $.5 million to $2.8 million
for 1997 from $2.3 million for 1996 and increased $2.1 million in 1996 from
$182,000 in 1995. The increase in interest income in 1997 was attributable
primarily to fluctuations in the Company's cash and cash equivalents and
short-term investments balances, coupled with interest fluctuations. The
increase in interest income in 1996 was due to the investment of the proceeds
from the Company's initial public offering of Common Stock in May 1996 of
approximately $54.5 million, net of issuance costs
Deferred Compensation Expense. The Company recorded deferred
compensation expense of approximately $1.4 million and $874,000 with respect to
options to purchase Common Stock granted and Preferred Stock issued during 1996
and 1995, respectively. Deferred compensation expense is being amortized over
the vesting period of the options, which is generally four years. The Company
recognized compensation expense of $480,000, $849,000 and $104,000 for 1997,
1996 and 1995, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations since inception primarily through
the private sale of capital stock and interest income on proceeds from private
financings as well as proceeds and interest thereon from its initial public
offering in May 1996. Through December 31, 1997, the Company had raised
approximately $77.2 million from the sale of stock, net of issuance costs.
Net cash used in the Company's operations was $17.4 million, $9.2
million, and $5.0 million for the years ended December 31, 1997, 1996, and 1995,
respectively. The increases in net cash used in the Company's operations were
primarily a result of higher research and development, general and
administrative, and sales and marketing activities. The Company's acquisition of
property and equipment was $360,000, $1.7 million, and $175,000 for the years
ended December 31, 1997, 1996, and 1995, respectively. The
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<PAGE> 19
increase in capital expenditures for 1996 was primarily due to relocating the
Company's facilities to Sunnyvale, California and to providing equipment for the
new employees hired during the year. *The Company expects a similar level of
capital expenditures in 1998.
At December 31, 1997, the Company had cash, cash equivalents and
available-for-sale securities, totaling $40.5 million. *The Company plans to
finance its operations and capital needs principally from the cash, cash
equivalents and available-for-sale securities, and, to the extent available,
from bank and lease financing, and believes these sources of cash will be
sufficient to fund its operations through 1998. However, the Company's future
liquidity and capital requirements will depend upon numerous factors, including
the level of sales of the Company's products generated by BSC in major and
emerging international markets; market acceptance of, and demand for the
Company's products; the Company's clinical research and product development
programs; the receipt of, and the time required to obtain, regulatory clearances
and approvals; the resources the Company devotes to the development, manufacture
and marketing of its products; the resources required to hire and develop a
direct sales force in the United States, and to expand manufacturing capacity;
facilities requirements; and other factors. *Although the Company believes its
current levels of cash, cash equivalents, and available-for-sale securities,
together with cash generated from operations, will provide adequate funding for
its operations and capital requirements through 1998, the Company may be
required to raise additional funds through public or private debt or equity
financings, collaborative relationships, bank facilities or other arrangements.
*There can be no assurance the Company will not require additional funding
sooner or that such additional funding, if needed, will be available on terms
attractive to the Company, or at all. *Any additional equity financing may be
dilutive to stockholders, and debt financing, if available, may involve
restrictive covenants.
As of December 31, 1997, the Company had federal and California net
operating loss carryforwards of approximately $32.5 million and $10.0 million,
respectively. The federal and California net operating loss carryforwards will
expire by the years 2012 and 2002, respectively, if not utilized. Utilization of
net operating loss carryforwards is subject to certain limitations under the Tax
Reform Act of 1986, as amended, where certain changes occur in the stock
ownership of a company. *These annual limitations may result in expiration of
net operating loss carryforwards before they can be fully utilized.
IMPACT OF THE YEAR 2000 ON INFORMATION SYSTEMS
The Company relies on computers and computer software to run its
business, as do its vendors, suppliers and customers. These computers and
computer software may not be able to properly recognize the dates commencing in
the Year 2000. The Company has not completed an assessment of the impact this
may have on its businesses and does not have a reasonable basis to conclude
whether the impact of the Year 2000 dates will or will not materially affect
future results. To date the Company has not found any material impact which may
result from failure of its computers and computer software or that of its
vendors, suppliers, and customers. However, the Company plans to make an
assessment of this during 1998, and, if appropriate, develop an action plan to
correct it.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for the reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements. Comprehensive income is defined as the change in equity of
a business enterprise during a period, resulting from transactions and other
events and circumstances from nonowner sources. The impact of adopting SFAS No.
130, which is effective for the Company in 1998, has not been determined.
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 131, "Disclosure about Segments of an Enterprise and Related
Information." SFAS No. 131 requires publicly-held companies to report financial
and other information about key revenue-producing segments of the entity for
which such information is available and is utilized by the chief operating
decision maker. Specific information to be reported for individual segments
includes profit or loss, certain revenue and expense items and total assets. A
reconciliation of segment financial information to amounts reported in the
financial statements would be provided. SFAS No. 131 is effective for the
Company in 1998. The Company operates in one business segment; namely, the
research, development, manufacture and sale of cardiovascular devices.
RISK FACTORS
Reliance on a Third Party for All International Sales
Until such time, if ever, as the FDA approves the Company's TMR systems
for marketing in the United States, the Company anticipates it will derive its
revenues primarily from BSC as the Company's exclusive international
distributor. The agreement with BSC will not allow the Company to control
international end-market prices and might not result in the same level of sales
and marketing efforts as would be the case if the Company used a direct sales
force. BSC has certain rights to terminate the agreement with the Company which,
if exercised, would require the Company to make alternative arrangements for the
sale of its products internationally, and could have a material adverse effect
on the Company's business, financial condition and results of operations. Even
if FDA approval is obtained, the Company expects international sales will
continue to account for a significant portion of the Company's total revenues.
As a result, most of the Company's revenues until such approval is obtained, and
a significant portion of the Company's revenues thereafter, will be subject to
the risks associated with international sales, including foreign currency
fluctuations, economic or political instability, foreign tax laws, shipping
delays, various tariffs and trade regulations and restrictions and foreign
medical regulations, any of which could have a significant impact on the
Company's revenues. Future imposition of, or significant increases in the level
of, customs duties, export quotas or other trade restrictions, could have a
material adverse effect on the Company's business, financial condition and
results of operations. The international nature of the Company's business also
subjects it and BSC to laws and regulations of the international jurisdictions
in which they operate or in which the Company's products may be sold. The
regulation of medical devices in a number of such jurisdictions, particularly in
the EEA, continues to develop and there can be no assurance new laws or
regulations will not have an adverse effect on the Company's business, financial
condition and results of operations. The Company has four pending international
patent applications and has been issued no international patents to date. While
the Company intends to file and prosecute existing and future patent
applications in various European countries, the laws of certain foreign
countries do not protect the Company's intellectual property rights to the same
extent as do the laws of the United States.
Uncertainty of Clinical Adoption of TMR; Need for Increased
Understanding of TMR Mechanism
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<PAGE> 20
Although TMR therapy using lasers has been in development since the
1980s, TMR remains experimental and has not achieved broad clinical adoption.
The Company is unable to predict whether or at what rate and how broadly TMR
will be adopted by the medical community.
Physician endorsements will be essential for clinical adoption of TMR.
Even if the clinical efficacy of TMR is established, physicians may elect not to
recommend TMR for any number of reasons. The reasons why TMR may effectively
treat CAD are not well understood. Although the Company intends to use research,
development and clinical efforts to enhance knowledge of the physiological
effects of TMR, there can be no assurance such understanding will be achieved on
a timely basis, or at all. Failure of the Company and its competitors to gain a
thorough understanding of the physiological effects of TMR, and to disseminate
such understanding within the medical community, could adversely effect the
clinical adoption of TMR.
Clinical adoption of TMR will also depend upon the Company's ability to
facilitate training of cardiothoracic surgeons and interventional cardiologists
in TMR therapy, and the willingness of such physicians to adopt such procedures.
Patient acceptance of the procedure will depend in part upon physician
recommendations as well as other factors, including the degree of invasiveness,
the effectiveness of the procedure, and the rate and severity of complications
associated with the procedure as compared to other procedures. Even if TMR is
clinically adopted, physicians may elect not to recommend the procedure unless
acceptable reimbursement from health care payors is available. Failure of TMR,
for whatever reason, to achieve significant clinical adoption or failure of the
Company's TMR systems to achieve any significant market acceptance would have a
material adverse effect on the Company's business, financial condition and
results of operations. See " -- Uncertain Availability of Third-Party
Reimbursement."
Early Stage of Clinical Trials; No Assurance of Safety or Efficacy
The Company's ITMR and PMR Systems are at an early stage of clinical
testing, and there can be no assurance regarding the clinical safety or efficacy
of either of these systems. The Company has not begun clinical trials of its
TTMR Systems and there can be no assurance this system will be approved for
clinical trials. Clinical trials of the Company's TMR systems will require
dedication by the Company of substantial financial and management resources, and
completing such trials will take several years. There can be no assurance any of
the Company's TMR systems will prove to be safe or effective. If the Company's
TMR systems do not prove to be safe and effective in clinical trials or if the
Company is otherwise unable to commercialize its TMR systems successfully, the
Company's business, financial condition, and results of operations would be
materially and adversely affected and could result in the cessation of the
Company's business.
Dependence on TMR Product Line; Rapid Technological Change
The Company is not currently developing any products other than its TMR
systems. Consequently, the Company is dependent on the successful development
and commercialization of the Company's TMR systems. Unfavorable clinical trial
results, failure to obtain regulatory approvals in a timely manner, or at all,
or failure to gain widespread market acceptance for any of the Company's TMR
systems would have a material adverse effect on the Company's business,
financial condition and results of operations and cessation of the Company's
business could occur.
The medical device industry is characterized by rapid and significant
technological change. Therefore, the Company's future success will depend in
large part on the Company's ability to continue to respond to such changes, as
well as to expand the indications and applications for which its products are
used, through the timely development and successful introduction of enhanced and
new versions of its TMR systems. Product research and development will require
substantial expenditures and will be subject to inherent risks, and there can be
no assurance the Company will be successful in identifying products for which
demand exists or in developing products that have the characteristics necessary
to treat particular indications, or that any new product introduced will receive
regulatory approval or will be commercially successful.
No Assurance of Obtaining Required Regulatory Approvals to Market
Products in the United States;
Significant Time Before Submission of Any PMA
To date, none of the Company's products has been approved for sale in
the United States. Prior to receiving regulatory approval for marketing in the
United States, medical devices such as the Company's products are subject to
rigorous preclinical and clinical testing mandated by the FDA and, to a lesser
extent, by state regulatory authorities, such as the CDHS. The process of
obtaining and maintaining requisite regulatory approvals is lengthy, expensive
and uncertain. The
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IDE/PMA process generally takes several years or longer to complete and is
expensive. Moreover, regulatory approvals, if granted, may include significant
limitations on the indicated uses for which a product may be marketed. FDA
enforcement policy strictly prohibits the marketing of approved medical devices
for unapproved uses.
The Company's TMR systems will require approval of a PMA by the FDA
before such products can be marketed in the United States. The Company has
received FDA approval of three IDEs for its ITMR System. All three clinical
trials - a feasibility study of ITMR; a Phase II prospective, randomized,
multi-center study of ITMR; and a study of ITMR therapy as an adjunct to CABG-
have begun. The Company has received FDA approval of one IDE for its Axcis PMR
System for a multi-center clinical trial of no-option patients at up to ten
clinical sites. The Company has not submitted an application to the FDA for an
IDE for its PMR System or TTMR System. FDA regulations subject sponsors of IDEs
to certain requirements, including proper monitoring of clinical investigations,
selection of qualified investigators, record keeping, reporting of unanticipated
adverse device events and submission of periodic progress reports. The FDA also
has the authority to inspect premises where devices are held and to inspect and
copy all records pertaining to an investigation. In addition, a sponsor is
prohibited from promoting or commercializing a device prior to receiving PMA
approval. There can be no assurance any feasibility study that the Company
proposes will be approved by the FDA, will be completed or, if completed, will
provide sufficient data and information to support additional clinical
investigations of the type necessary to obtain FDA marketing clearance or
approval. There can be no assurance any of the Company's products will ever be
approved for sale in the United States. Additionally, there can be no assurance
required United States regulatory filings will be made in a timely manner,
approvals to commence future clinical trials will be received, clinical trials
will commence or be concluded in the time frames anticipated by the Company, any
such clinical trials will be successful or the Company will be able to obtain
regulatory approvals on a timely basis, or at all, to market its products.
Delays in initiating or completing clinical trials or in the receipt of
regulatory approval of the Company's products, the failure to obtain regulatory
approvals for such products, significant limitations in the indicated uses for
which such products may be marketed or substantial costs incurred in obtaining
such approvals would have a material adverse effect on the Company's business,
financial condition and results of operations and cessation of the Company's
business could occur.
In January 1996, the Company reported to the FDA the existence of an
error in the software incorporated into the Ho:YAG laser included in its TMR
systems. The Company's laser manufacturer New Star had determined that, under
certain circumstances, the laser could be fired even though its control panel
indicated it was in the "stand-by" mode. The Company initiated a voluntary field
correction of the lasers, categorized as a Class II recall by the FDA, and the
software error has been corrected. FDA defines a Class II recall as one in which
use of, or exposure to, the product may cause temporary or medically adverse
health consequences or where the probability of serious adverse health
consequences is remote. The FDA has acknowledged the correction of the software
error and the completion of the related field activities. However, there can be
no assurance the Company will not experience future product defects,
malfunctions, manufacturing difficulties or recalls related to the Ho:YAG laser
or any other component used in the Company's TMR systems. Any such occurrence
could cause delay in regulatory approvals or adversely affect acceptance of the
Company's products and could have a material adverse effect on the Company's
business, financial condition and results of operations.
Need to Comply with International Government Regulation
International sales of medical devices often are subject to regulatory
requirements in foreign countries. The regulatory review process varies from
country to country. The Company's products are subject to pre-market approval in
the European Union and subject to other regulatory requirements in those and
other countries. In addition, the regulation of medical devices continues to
change. Any enforcement action by regulatory authorities with respect to past or
future regulatory noncompliance could have a material adverse effect on the
Company's business, financial condition and results of operations.
The time required to obtain approval for sale in foreign countries may
be longer or shorter than required for FDA approval, and the requirements may
differ. In addition, there may be foreign regulatory barriers other than
pre-market approval. The FDA must approve exports of devices that require a PMA
but are not yet approved domestically, unless they are approved for sale by any
member country of the European Union and the other "listed" countries, including
Australia, Canada, Israel, Japan, New Zealand, Switzerland and South Africa, in
which case they can be exported for sale to any country without prior FDA
approval. In addition, an unapproved device may be exported without prior FDA
approval to the listed countries for investigational use in accordance with the
laws of those countries.
To sell its TMR Systems within the EEA, the Company has received
approval to affix CE markings on its products to attest the Company's compliance
with the
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requirements of the MDD of the EEA (the "MDD"). The Company will be subject to
continued supervision and will be required to report any serious adverse
incidents to the appropriate authorities. The Company also will be required to
comply with additional national requirements that are outside the scope of the
MDD. In addition, the Company has received ISO 9001/EN 46001 certification,
which was required to meet the CE Mark certification prerequisites. The Company
has not received CE Mark certification for the sale of its other systems in the
EEA. There can be no assurance the Company will be able to achieve or maintain
the compliance required for CE marking on all or any of its products or it will
be able to produce its products profitably and in a timely manner while
complying with the requirements of the MDD and other regulatory requirements.
Failure to comply with applicable regulatory requirements can result in
fines, injunctions, civil penalties, recalls or seizures of products, total or
partial suspensions of production, refusals by foreign governments to permit
product sales and criminal prosecution. Furthermore, changes in existing
regulations or adoption of new regulations or policies could prevent the Company
from obtaining, or affect the timing of, future regulatory approvals or
clearances. There can be no assurance the Company will be able to obtain
necessary regulatory clearances or approvals on a timely basis or at all or it
will not be required to incur significant costs in obtaining or maintaining such
foreign regulatory approvals. Delays in receipt of, or failure to receive, such
approvals or clearances, the loss of previously obtained approvals or clearances
or the failure to comply with existing or future regulatory requirements would
have a material adverse effect on the Company's business, financial condition
and results of operations.
Risk of Infringement; Patents and Proprietary Technology
The Company is dependent in large part on its ability to obtain patent
protection for its products and processes, to preserve its trade secrets and
proprietary technology, and to operate without infringing upon the patents or
proprietary rights of third parties. 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. Certain of the
Company's competitors and potential competitors have obtained United States
patents covering technology that could be used for certain TMR procedures, and
there can be no assurance such competitors, potential competitors or others have
not filed and do not hold international patents covering other TMR technology.
No assurance can be given that any such international patents would be
interpreted the same as any counterpart United States patents.
From time to time, the Company has been contacted by various third
parties requesting the Company review and consider the applicability of certain
patents to the Company's technology. In particular, in February 1995, the
Company received a letter from PLC advising the Company of the existence of
certain of PLC's patents, including the PLC Patent. This letter requested an
assessment by the Company of the Company's activities in this area. The Company
believes, based on its review of the PLC Patent and an opinion of the Company's
counsel, the Company's TMR systems do not infringe such PLC Patent. In 1996, the
Company initiated a suit against PLC seeking a judgment that the PLC Patent is
invalid and unenforceable. PLC has counterclaimed against the Company for patent
infringement.
While the Company periodically reviews the scope of its patents and
other relevant patents of which it is aware, the question of patent infringement
involves complex legal and factual issues and there can be no assurance any
conclusion reached by the Company regarding infringement will be consistent with
the resolution of any such issues by a court. Further, there can be no assurance
the Company will not become subject to patent infringement claims or litigation
or interference proceedings declared by the U.S. Patent Office to determine the
priority of inventions.
The defense and prosecution of intellectual property suits, U.S. Patent
office interference proceedings and related legal and administrative proceedings
are both costly and time-consuming. Further litigation may be necessary to
enforce patents issued to the Company, to protect trade secrets or know-how
owned by the Company or to determine the enforceability, scope and validity of
the proprietary rights of others. Any litigation or interference proceedings
will result in substantial expense to the Company and significant diversion of
effort by the Company's technical and management personnel. An adverse
determination in such litigation or interference proceedings could subject the
Company to significant liabilities to third parties, require the Company to seek
licenses from third parties, prevent the Company from selling its products in
certain markets or at all, or require the Company to modify its products.
Although patent and intellectual property disputes regarding medical devices are
often settled through licensing and similar arrangements, costs associated with
such arrangements may be substantial and could include ongoing royalties.
Furthermore, there can be no assurance the necessary licenses would be available
to the Company on satisfactory terms, if at all. Adverse determinations in a
judicial or administrative proceeding or failure to obtain necessary licenses
could prevent the Company from manufacturing and
22
<PAGE> 23
selling its products, which would have a material adverse effect on the
Company's business, financial condition and results of operations.
The validity and breadth of claims in medical technology patents involve
complex legal and factual questions and, therefore, may be highly uncertain. No
assurance can be given that any issued patent or patents based on pending patent
applications or any future patent application will exclude competitors or
provide competitive advantages to the Company, that any of the Company's patents
in which it has licensed rights 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 or licensed by the Company. Furthermore, there can be no
assurance others have not developed or will not develop similar products,
duplicate any of the Company's products or design around any patents issued to
or licensed by the Company or that may be issued in the future to the Company.
Since patent applications in the United States are maintained in secrecy until
patents issue, the Company also cannot be certain others did not first file
applications for inventions covered by the Company's pending patent
applications, nor can the Company be certain it will not infringe any patents
that may issue to others on such applications.
The U.S. patent laws were recently amended to exempt physicians, other
health care professionals, and affiliated entities from infringement liability
for medical and surgical procedures performed on patients. The Company cannot
predict whether this amendment might have a material adverse effect on the
Company's ability to protect its proprietary methods and procedures.
The Company typically requires its employees, consultants and advisors
to execute confidentiality and assignment of inventions agreements in connection
with their employment, consulting or advisory relations with the Company. There
can be no assurance, however, that these agreements will not be breached or that
the Company will have adequate remedies for any breach. Furthermore, no
assurance can be given that competitors will not independently develop
substantially equivalent proprietary information and techniques or otherwise
gain access to the Company's proprietary technology, or that the Company can
meaningfully protect its rights in unpatented proprietary technology.
Highly Competitive Markets; Risk of Alternative Therapies
Competition in the market for the treatment of CAD, in the medical
device industry generally, and in the TMR market in particular, is intense and
is expected to increase. The Company competes primarily with other producers of
TMR systems, including PLC, Eclipse, and U.S. Surgical. Some of the Company's
competitors and many of its potential competitors have substantially greater
name recognition and capital resources than does the Company and also may have
greater resources and expertise in the areas of research and development,
obtaining regulatory approvals, manufacturing and marketing. The TMR market is
characterized by rapid technical innovation. There can be no assurance the
Company's competitors will not succeed in developing TMR products or procedures
that are more effective or more effectively marketed than products marketed by
the Company or that render the Company's technology obsolete. Additionally, even
if the Company's products provide performance comparable to competing products,
there can be no assurance the Company will be able to obtain necessary
regulatory approvals to compete against competitors in terms of manufacturing,
marketing and sales. Certain companies, including PLC and Eclipse have completed
enrollment in randomized clinical trials of products and procedures involving
TMR that compete with those offered by the Company, and received regulatory
approvals in Europe to begin commercially marketing their various TMR products.
Earlier entrants in the market in a therapeutic area often obtain and maintain
greater market share than later entrants.
There can be no assurance that the Company will be able to continue to
compete successfully in the future. *The Company believes the primary
competitive factors in the market for TMR systems include clinical performance,
product safety and reliability, availability of third-party reimbursement,
product design specifically for TMR use, product quality, ease of use, price,
customer service and company reputation. In addition, the length of time
required for products to be developed and receive regulatory approval and the
ability to use patents or other proprietary rights to prevent sales by
competitors are also important competitive factors.
Many of the medical indications that may be treatable with TMR are
currently being treated by drug therapies or surgery and other interventional
therapies, including CABG and PTCA. A number of these therapies are widely
accepted in the medical community, have a long history of use and continue to be
enhanced rapidly. There is no assurance that procedures using TMR will be able
to replace or augment such established treatments or that clinical research will
support the use of TMR. Additionally, new surgical procedures and new drug
therapies are being developed by other parties to treat CAD. These new
procedures and drug therapies could be more effective, safer or more
23
<PAGE> 24
cost-effective than TMR. The inability of TMR to replace or augment existing
therapies or to be more effective, safer or more cost-effective than new
therapies could have a material adverse effect on the Company's business,
financial condition and results of operations.
Uncertain Availability of Third-Party Reimbursement
In the United States, hospitals, physicians and other health care
providers that purchase medical devices generally rely on third-party payors to
reimburse all or part of the cost of the procedure in which the medical device
is being used. Few individuals are able to pay directly for the costs associated
with the use of the Company's products. Certain Third-Party Payors such as
Medicare determine whether to provide coverage for a particular procedure and
then reimburse hospitals for inpatient medical services at a prospectively fixed
rate based on the diagnosis related group ("DRG") to which the case is assigned.
DRG assignment is based on the diagnosis of the patient and the procedures
performed. The fixed rate of reimbursement established by Medicare is
independent of the hospital's cost incurred for the specific case and the
specific devices used. Medicare and other Third-Party Payors are increasingly
scrutinizing whether to cover new products and the level of reimbursement for
covered products. The Company intends to work with government officials to
secure a DRG assignment for its TMR systems that would provide hospitals with
appropriate payment. A failure by the Company to secure approval of a DRG that
adequately reflects the costs associated with use of the Company's TMR system
could have a material adverse effect on its business, financial condition and
results of operations.
*Although the Company does not anticipate receiving reimbursements for
its ITMR Systems from Medicare during its clinical trials, the Company does
intend to seek reimbursement from other Third-Party Payors. There can be no
assurance, however, that such reimbursement will be available.
Third-Party Payors that do not use prospectively fixed payments
increasingly use other cost-containment processes that may pose administrative
hurdles to the use of the Company's products. In addition, Third-Party Payors
may deny reimbursement if they determine that the device used in a treatment is
unnecessary, inappropriate, experimental, used for a non-approved indication or
not cost-effective. Potential purchasers must determine the clinical benefits of
the Company's TMR systems justify the additional cost or the additional effort
required to obtain prior authorization or coverage and the uncertainty of
actually obtaining such authorization or coverage.
Physician services are reimbursed by Medicare based on a physician fee
schedule as coded under the CPT-4 coding system. There is no assurance the codes
that will be used for submitting claims for TMR procedures using the Company's
products will result in Medicare payment levels that physicians consider to be
adequate. These codes and their associated weights are used by many other
Third-Party Payors in addition to Medicare. A failure by physicians to receive
what they consider to be adequate reimbursement for the TMR procedures in which
the Company's products are used could have a material adverse effect on the
Company's business, financial condition, and results of operations.
If the Company obtains the necessary foreign regulatory registrations or
approvals, market acceptance of the Company's products in international markets
would be dependent, in part, upon the availability of reimbursement within
prevailing health care payment systems. Reimbursement and health care payment
systems in international markets vary significantly by country, and include both
government sponsored health care and private insurance. Although the Company
intends to seek international reimbursement approvals, there can be no assurance
any such approvals will be obtained in a timely manner, if at all. Failure to
receive international reimbursement approvals could have a material adverse
effect on market acceptance of the Company's products in the international
markets in which such approvals are sought.
*The Company believes the overall escalating cost of medical products
and services has led, and will continue to lead, to increased pressures on the
health care industry, both foreign and domestic, to reduce the cost of products
and services, including products offered by the Company. There can be no
assurance in either United States or international markets that third-party
reimbursement and coverage will be available or adequate, that current
reimbursement amounts will not be decreased in the future or that future
legislation, regulation or reimbursement policies of Third-Party Payors will not
otherwise adversely affect the demand for the Company's products or its ability
to sell its products on a profitable basis. The unavailability of Third-Party
Payor coverage or the inadequacy of reimbursement could have a material adverse
effect on the Company's business, financial condition and results of operations.
In addition, fundamental reforms in the healthcare industry in the United States
and Europe continue to be considered, although the Company cannot predict
whether or when any healthcare reform proposals will be adopted and what impact
such proposals might have.
24
<PAGE> 25
Dependence on Sole Suppliers
A major component used in the Company's TMR systems, the ECG monitor, is
currently available from a sole source. In addition, several other components
used in the Company's TMR systems are purchased by the Company from a single
supplier. The Company periodically conducts assessments of alternative vendors
for various components used in its TMR systems. However, the qualification of
additional or replacement vendors for certain components is a lengthy process.
In addition, if the Company were to retain different suppliers of the ECG
monitor, the Company would need to obtain approval from the FDA in an IDE or PMA
amendment (if the IDE or PMA were still under review) or an IDE or PMA
supplement (if the IDE or PMA were already approved). There can be no assurance
that such approval would be obtained on a timely basis, if at all. Although the
FDA is required by law to complete its review of a PMA or PMA supplement within
180 days, the FDA may take a significantly longer period of time to complete its
review. Any significant interruption in the supply of components used in the
Company's TMR systems would have a material adverse effect on the Company's
ability to manufacture its products and, therefore, a material adverse effect on
its business, financial condition and results of operations.
Certain of the Company's suppliers, including the manufacturers of its
laser, could have difficulty expanding their manufacturing capacity to meet the
Company's needs if demand for the Company's TMR systems were to increase rapidly
or significantly. In addition, any defect or malfunction in the laser or other
products provided by the Company's suppliers could cause delay in regulatory
approvals or adversely affect acceptance of the Company's products. There can be
no assurance materials obtained from outside suppliers will continue to be
available in adequate quantities or that the Company will be able to locate
alternative suppliers on a timely basis. The failure to obtain sufficient
quantities of lasers or component materials would have a material adverse effect
on the Company's business, financial condition and results of operations.
The Company purchases lasers from its suppliers pursuant to OEM Supply
Agreements, however, the Company generally operates on a purchase order basis
with most of its suppliers, including the manufacturer of the ECG monitor used
in the Company's TMR systems. Vendors that supply products to the Company and
could at any time determine to cease the supply and production of such
components, which could have a material adverse effect on the Company's
business, financial condition and results of operations.
Dependence on Management, Other Key Personnel and Scientific Advisors
The Company's ability to operate successfully depends in significant
part upon the continued service of certain key scientific, technical, managerial
and finance personnel and the Company's continuing ability to attract and retain
additional highly qualified personnel. *In order to support market development
and sales in the future and augment its long term competitive position, the
Company anticipates it will be required to make significant additions of
personnel in manufacturing, research and development and sales and marketing.
Competition for such personnel is intense, and there can be no assurance the
Company can attract or retain highly qualified scientific, technical,
manufacturing, sales and marketing and finance personnel in the future. The loss
of key personnel or the inability to hire or retain qualified personnel could
have a material adverse effect upon the Company's business, financial condition
and results of operations. In addition, many employees of the Company, including
a number of its key scientific, technical and managerial personnel, are subject
to the terms of confidentiality agreements with respect to proprietary
information of their former employers. The failure of these employees to comply
with the terms of their agreements with, or other obligations to, such former
employers could result in assertion of claims against the Company and such
employees, which, if successful, could restrict the role of such employees with
the Company and have a material adverse effect on the Company's business,
financial condition and results of operations.
The Company has established a Scientific Advisory Board including
experts in cardiac surgery, interventional cardiology, cardiology and basic
science. Members of the Scientific Advisory Board consult with the Company
regarding research and development efforts at the Company but are employed
elsewhere on a full-time basis. As a result, they can only spend a limited
25
<PAGE> 26
amount of time on the Company's affairs and there can be no assurance the
members of the Company's Scientific Advisory Board will continue to serve in
such capacity.
Need to Comply with United States Manufacturing Standards; Limited
Manufacturing Experience
The Company has limited experience in manufacturing its products.
Manufacturers often encounter difficulties in increasing production, including
problems involving production yields, adequate supplies of components, quality
control and assurance (including failure to comply with good manufacturing
practices ("GMP") regulations, international quality standards and other
regulatory requirements) and shortages of qualified personnel. Difficulties
experienced by the Company in manufacturing scale-up could have a material
adverse effect on its business, financial condition and results of operations.
There can be no assurance the Company will be successful in increasing
manufacturing capacity or it will not experience manufacturing difficulties or
product recalls in the future.
Under current law, if the Company markets its devices or manufactures
finished devices in the United States, it will be required to demonstrate
compliance with the FDA's current GMP regulations. In addition, the FDA will
inspect the Company's manufacturing facilities on a regular basis to determine
such compliance. The FDA could determine the Company's export of components is
not in compliance with the FDC Act or the FDA's regulations or policies and
prohibit exports in the future. Failure to comply with applicable FDA or other
regulatory requirements can result in fines, injunctions, civil penalties,
recalls or seizures of products, total or partial suspensions of production and
criminal prosecutions. The FDA has recently promulgated new GMP regulations. To
date, the Company has no experience dealing with the new regulations.
Product Liability Risk; Possible Insufficiency of Insurance
The Company's business exposes the Company to potential product
liability risks or product recalls that are inherent in the design, development,
manufacture and marketing of medical devices. The Company could be subject to
product liability claims if the use of the Company's TMR systems is alleged to
have caused adverse effects on a patient or such products are believed to be
defective. The Company's products are designed to be used in life-threatening
situations where there is a high risk of serious injury or death. Such risks
will continue to exist with respect to those products that may in the future
receive regulatory clearance for commercial sale. The failure to comply with the
FDA's GMP or other regulations could have a material adverse effect on the
ability of the Company to defend against product liability lawsuits. Although
the Company has not experienced any product liability claims to date, any such
claims could have a material adverse effect on the Company's business, financial
condition and results of operations. There can be no assurance the Company's
product liability insurance, with coverage limits of $5 million per occurrence
and in the aggregate and additional coverage limits of DM1 million
(approximately $546,000) per person and DM50 million (approximately $27,300,000)
in the aggregate for use of the Company's TMR systems in Germany, will be
adequate for any future product liability problems or that such insurance
coverage will continue to be available on commercially reasonable terms or at
all. Particularly given that TMR is not well understood and the lack of data
regarding the clinical safety and efficacy of the Company's TMR systems, there
can be no assurance such coverage limits would be adequate to protect the
Company from liabilities it might incur in connection with the development,
manufacture and sale of its products. In addition, the Company may require
increased product liability coverage if any products are commercialized. Product
liability insurance is expensive and in the future may not be available to the
Company on acceptable terms, if at all. If the Company was held liable for a
product liability claim or series of claims brought against the Company in
excess of its insurance coverage such liability could have a material and
adverse effect on the Company's business, financial condition and results of
operations.
Item 7A Quantitative and Qualitative Disclosures about Market Risk
Not Applicable.
26
<PAGE> 27
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
-----
Page
Report of Coopers & Lybrand L.L.P., Independent Accountants...........28
Consolidated Balance Sheets...........................................29
Consolidated Statements of Operations.................................30
Consolidated Statement of Stockholders' Equity (Deficit)..............31
Consolidated Statements of Cash Flows.................................32
Notes to Consolidated Financial Statements............................34
Financial Statement Schedule
The following financial statement schedule of the Company for the three
years ended December 31, 1997 is filed as part of this Form 10-K and should be
read in conjunction with the Consolidated Financial Statements, and related
notes thereto, of the Company.
Report of Independent Accountants on Financial Statement Schedule.....48
Schedule II - Valuation and Qualifying Accounts.......................49
All other schedules are omitted because they are not applicable or the
required information is shown in the consolidated financial statements or
notes thereto.
27
<PAGE> 28
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of CardioGenesis Corporation:
We have audited the accompanying consolidated balance sheets of CardioGenesis
Corporation as of December 31, 1997 and 1996, and the related consolidated
statements of operations, stockholders' equity (deficit) and cash flows for each
of the three years in the period ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of CardioGenesis
Corporation as of December 31, 1997 and 1996, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
COOPERS & LYBRAND L.L.P.
San Jose, California
January 30, 1998
28
<PAGE> 29
CARDIOGENESIS CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
-------
<TABLE>
<CAPTION>
December 31,
----------------------------
ASSETS 1997 1996
----------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 6,047 $ 2,080
Available-for-sale securities 24,469 53,626
Accounts receivable, net of allowance for doubtful
accounts of $50 in 1997 and $225 in 1996 3,293 2,024
Inventories 1,109 1,108
Interest receivable 574 934
Prepaids and other 1,177 454
---------- ----------
Total current assets 36,669 60,226
Property and equipment, net 1,529 1,546
Available-for-sale securities, noncurrent 10,019 2,502
Other assets 23 23
---------- ----------
Total assets $ 48,240 $ 64,297
========== ==========
LIABILITIES
Current liabilities:
Accounts payable $ 1,450 $ 237
Short-term note payable 40 215
Accrued expenses 1,828 1,696
Accrued compensation 626 384
Deferred revenue 150 370
---------- ----------
Total liabilities 4,094 2,902
---------- ----------
Commitments and contingencies (Note 6)
STOCKHOLDERS' EQUITY
Preferred stock, $0.001 par value:
Authorized: 2,000 shares
Issued and outstanding: no shares in 1997 and
1996
Common stock, $0.001 par value:
Authorized: 40,000 shares
Issued and outstanding: 12,067 shares in 1997 and
11,967 shares in 1996 12 12
Additional paid in capital 79,680 79,450
Deferred compensation (848) (1,328)
Unrealized gains on available-for-sale securities 39
Cumulative foreign currency translation adjustments 31 (4)
Accumulated deficit (34,706) (16,735)
---------- ----------
Total stockholders' equity 44,146 61,395
---------- ----------
Total liabilities and stockholders'
equity $ 48,240 $ 64,297
========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
29
<PAGE> 30
CARDIOGENESIS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
-------
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------
1997 1996 1995
--------- -------- ---------
<S> <C> <C> <C>
Sales $ 7,559 $ 3,959
Cost of sales 4,991 2,866
---------- ----------
Gross profit 2,568 1,093
---------- ----------
Operating expenses:
Research and development 14,210 7,140 $ 3,967
General and administrative 3,722 2,622 1,178
Sales and marketing 5,426 2,417 336
---------- ---------- ---------
Total operating expenses 23,358 12,179 5,481
---------- ---------- ---------
Operating loss (20,790) (11,086) (5,481)
Interest income 2,855 2,319 182
Interest expense and other (36) (33)
---------- ---------- ---------
Net loss $ (17,971) $ (8,800) $ (5,299)
========== ========== =========
Net loss per common share and per common share - assuming
dilution $ (1.49) $ (1.18) $ --
========== ========== =========
Shares used in computing net loss per common share and
per common share - assuming dilution 12,029 7,427 --
========== ========== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
30
<PAGE> 31
CARDIOGENESIS CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
(in thousands)
-------
<TABLE>
<CAPTION>
Common Stock Additional
-------------------------- Paid-In Deferred
Shares Amount Capital Compensation
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Balances, January 1, 1995
Deferred compensation related to issuance of
preferred stock and grants of stock options $ 874 $ (874)
Amortization of deferred compensation 104
Net loss
---------- ----------
Balances, December 31, 1995 874 (770)
Deferred compensation related to
issuance of preferred stock and grants
of stock options 1,407 (1,407)
Amortization of deferred compensation 849
Issuance of common stock upon
exercise of stock options and stock grants 409 75
Conversion of redeemable preferred stock to common
stock in connection with Initial Public Offering in
May 1996 8,558 $ 9 22,622
Issuance of common stock in Initial Public Offering, net
of issuance costs of $5,533 3,000 3 54,472
Foreign currency translation adjustment
Net loss
---------- ---------- ---------- ----------
Balances, December 31, 1996 11,967 12 79,450 (1,328)
Amortization of deferred compensation 480
Issuance of common stock upon
exercise of stock options and stock grants 83 76
Issuance of common stock under the Employee Stock
Purchase Plan 17 154
Change in unrealized gains on
available for sale securities
Foreign currency translation adjustment
Net loss
---------- ---------- ---------- ----------
Balances, December 31, 1997 12,067 $ 12 $ 79,680 $ (848)
========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
Unrealized Cumulative
Gains on Foreign Total
Available- Currency Stockholders'
Accumulated For-Sale Translation Equity
Deficit Securities Adjustments (Deficit)
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Balances, January 1, 1995 $ (2,636) $ (2,636)
Deferred compensation related to issuance of
preferred stock and grants of stock options --
Amortization of deferred compensation 104
Net loss (5,299) (5,299)
---------- ---------- ---------- ----------
Balances, December 31, 1995 (7,935) (7,831)
Deferred compensation related to
issuance of preferred stock and grants
of stock options --
Amortization of deferred compensation 849
Issuance of common stock upon
exercise of stock options and stock grants 75
Conversion of redeemable preferred stock to common
stock in connection with Initial Public Offering in
May 1996 22,631
Issuance of common stock in Initial Public Offering, net
of issuance costs of $5,533 54,475
Foreign currency translation adjustment $ (4) (4)
Net loss (8,800) (8,800)
---------- ---------- ---------- ----------
Balances, December 31, 1996 16,735 (4) 61,395
Amortization of deferred compensation 480
Issuance of common stock upon
exercise of stock options and stock grants 76
Issuance of common stock under the Employee Stock
Purchase Plan 154
Change in unrealized gains on
available for sale securities $ 39 39
Foreign currency translation adjustment (27) (27)
Net loss (17,971) (17,971)
---------- ---------- ---------- ----------
Balances, December 31, 1997 $ (34,706) $ 39 $ (31) $ 44,146
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
31
<PAGE> 32
CARDIOGENESIS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
-------
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (17,971) $ (8,800) $ (5,299)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 375 310 114
Amortization of deferred compensation 480 849 104
Loss on disposal of property and equipment 2 152 215
Changes in assets and liabilities:
Accounts receivable (1,268) (1,154) (870)
Inventories (1) (483) (625)
Interest receivable 360 (832) (102)
Prepaids and other (723) (231) (161)
Accounts payable 1,213 (283) 475
Accrued expenses 132 1,395 126
Accrued compensation 242 411 129
Deferred revenue (220) (500) 870
---------- ---------- ----------
Net cash used in operating activities (17,379) (9,166) (5,024)
---------- ---------- ----------
Cash flows from investing activities:
Purchase of available-for-sale securities (129,897) (200,922) (30,235)
Maturities of available-for-sale securities 151,575 154,681 23,869
Acquisition of property and equipment (360) (1,678) (175)
(Increase) decrease in other assets 13 (21)
---------- ---------- ----------
Net cash provided by (used in) investing activities 21,318 (47,906) (6,562)
---------- ---------- ----------
Cash flows from financing activities:
Proceeds from note payable 215
Payments on note payable (175)
Proceeds from issuance of preferred stock, net of
issuance costs 241 13,934
Proceeds from issuance of common stock, net of
issuance costs 230 54,550
---------- ---------- ----------
Net cash provided by financing activities 55 55,006 13,934
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents 3,994 (2,066) 2,348
Effect of exchange rates on cash and cash equivalents (27) (4)
Cash and cash equivalents, beginning of year 2,080 4,150 1,802
---------- ---------- ----------
Cash and cash equivalents, end of year $ 6,047 $ 2,080 $ 4,150
========== ========== ==========
SUPPLEMENTAL CASH FLOW INFORMATION:
Conversion of redeemable
preferred stock to common stock in connection with the
Company's Initial Public Offering $ 22,631
==========
Unrealized gains on available-for-sale securities $ 39
==========
</TABLE>
32
<PAGE> 33
The accompanying notes are an integral part of these consolidated financial
statements.
33
<PAGE> 34
CARDIOGENESIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------
1. Summary of Significant Accounting Policies:
BUSINESS:
CardioGenesis Corporation, (the Company) was incorporated in September
1993 to conduct research, develop and manufacture cardiovascular
surgical devices, including disposable systems, to perform both
surgical and catheter based percutaneous transmyocardial
revascularization. Since its inception, the Company has devoted
substantially all of its efforts to developing products and bringing
them to market, raising capital and recruiting personnel. The Company's
principal operations commenced during 1996 at which time it emerged
from the development stage.
In the course of its development activities, the Company has sustained
operating losses and expects such losses to continue at least through
1999. The Company will finance its operations primarily through its
cash, cash equivalents and available-for-sale securities, together with
existing credit facilities and future revenues. There can be no
assurance that the Company will not require additional funding and
should this prove necessary, the Company may sell additional shares of
its common or preferred stock through private placement or further
public offerings.
In May 1996, the Company completed its Initial Public Offering (IPO)
selling 3,000,000 shares of its common stock with net proceeds of $54.5
million.
BASIS OF CONSOLIDATION:
The consolidated financial statements include the accounts of
CardioGenesis Corporation and its wholly owned subsidiary after all
intercompany balances and transactions have been eliminated.
CASH AND CASH EQUIVALENTS:
The Company considers all highly liquid investments purchased with an
original maturity of three months or less from the date of purchase and
money market funds to be cash equivalents.
AVAILABLE-FOR-SALE SECURITIES:
All investments are classified as available-for-sale and therefore are
carried at fair market value. Unrealized gains and losses on such
securities are reported as a separate component of stockholders'
equity. Realized gains and losses on sales of all such securities are
reported in earnings and computed using the specific identification
cost method.
7
CONTINUED
34
<PAGE> 35
CARDIOGENESIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
-------
1. Summary of Significant Accounting Policies, continued:
INVENTORIES:
Inventories are stated at the lower of cost (determined on a first-in,
first-out basis) or market.
PROPERTY AND EQUIPMENT:
Property and equipment are recorded at cost and depreciated using the
straight-line method over the estimated useful lives of the respective
assets, generally two to seven years. Amortization of leasehold
improvements is provided on a straight-line basis over the estimated
useful life of the related asset or the lease term, whichever is
shorter. Maintenance and repairs are charged to operations as incurred.
REVENUE RECOGNITION:
The Company recognizes product sales upon shipment of product to the
customer and fulfillment of acceptance terms, if any, and when no
significant contractual obligations remain outstanding.
RESEARCH AND DEVELOPMENT:
Research and development costs are charged to operations as incurred.
CONCENTRATION OF CREDIT RISK AND OTHER RISKS AND UNCERTAINTIES:
The majority of the Company's cash, cash equivalents and
available-for-sale securities are invested in deposits with a major
bank in the United States. Deposits in this bank may exceed the amount
of insurance provided on such deposits.
Sales to both international and domestic customers are generally made
on open credit terms. Management performs ongoing credit evaluations of
the Company's customers and maintains an allowance for potential credit
losses when needed, but historically has not experienced any
significant losses related to individual customers or groups of
customers in any particular geographic area.
The Company's products require approval of the Food and Drug
Administration (FDA) or other international regulatory agencies prior
to commercialized sales. The Company cannot be assured that its
products will receive this regulatory approval. During 1996, the
Company received approval to market its ITMR system in the European
Community. If the Company was denied regulatory approval or approval
was delayed, it would have a material adverse impact on the Company.
CONTINUED
35
<PAGE> 36
CARDIOGENESIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
-------
1. Summary of Significant Accounting Policies, continued:
CONCENTRATION OF CREDIT RISK AND OTHER RISKS AND UNCERTAINTIES,
continued:
The Company purchases all of its ECG monitors from one of two
suppliers. Management believes that other producers could be found to
supply ECG monitors to the Company's specifications with relatively
consistent pricing. [Management believes that there would be minimal
delay if the Company was required to change suppliers. If the Company
experienced delays in locating a new supplier of ECG monitors, it would
have a material adverse impact on the Company.]
Export sales totaled approximately $4.5 million and $2.0 million for
1997 and 1996, respectively.
The Company operates in an industry which experiences rapid
technological changes, which may render inventories maintained by the
Company obsolete.
INCOME TAXES:
Income taxes are accounted for under the liability method. Deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax
basis. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled.
Valuation allowances are established when necessary to reduce deferred
tax assets to the amounts expected to be realized.
CONTINUED
36
<PAGE> 37
CARDIOGENESIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
-------
1. Summary of Significant Accounting Policies, continued:
USE OF ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
FOREIGN CURRENCY TRANSLATION:
The Company's international subsidiary uses its local currency as its
functional currency. Assets and liabilities are translated at exchange
rates in effect at the balance sheet date and income and expense
accounts at average exchange rates during the year. Resulting
translation adjustments are recorded directly to a separate component
of stockholders' equity.
COMPUTATION OF NET LOSS PER COMMON SHARE AND PER COMMON SHARE-ASSUMING
DILUTION:
The Company adopted Statement of Financial Accounting Standards (SFAS)
No. 128 "Earnings Per Share" and the Securities and Exchange Commission
Staff Accounting Bulletin No. 98 (SAB No. 98) effective December 31,
1997; accordingly, all prior periods have been restated. Net loss per
common share and per common share-assuming dilution are computed using
the weighted average number of shares of common stock outstanding.
Common equivalent shares from stock options and preferred stock are
excluded from the computation of net loss per common share-assuming
dilution as their effect is antidilutive. No additional shares are
considered to be outstanding for either computation under the
provisions of SAB No. 98. As of December 31, 1995 there were 246
shares of common stock outstanding. The Company does not believe that
earnings per share for periods prior to its Initial Public Offering
are meaningful.
RECLASSIFICATIONS:
Certain amounts in the financial statements have been reclassified to
conform with the current year's presentation. The reclassifications had
no impact on previously reported net losses.
CONTINUED
37
<PAGE> 38
CARDIOGENESIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
-------
1. Summary of Significant Accounting Policies, continued:
RECENT ACCOUNTING PRONOUNCEMENTS:
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income." SFAS No. 130 establishes standards for the
reporting and display of comprehensive income and its components in a
full set of general purpose financial statements. Comprehensive income
is defined as the change in equity of a business enterprise during a
period, resulting from transactions and other events and circumstances
from nonowner sources. The impact of adopting SFAS No. 130, which is
effective for the Company in 1998, has not been determined.
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 131, "Disclosure about Segments of an Enterprise and
Related Information." SFAS No. 131 requires publicly-held companies to
report financial and other information about key revenue-producing
segments of the entity for which such information is available and is
utilized by the chief operating decision maker. Specific information to
be reported for individual segments includes profit or loss, certain
revenue and expense items and total assets. A reconciliation of segment
financial information to amounts reported in the financial statements
would be provided. SFAS No. 131 is effective for the Company in 1998.
The Company operates in one business segment; namely, the research,
development, manufacture, and sale of cardiovascular surgical devices.
2. Available-for-Sale Securities:
At December 31, 1997, available-for-sale securities consisted of corporate
obligations and obligations of federal government agencies, bearing
interest at rates ranging from 5.51% to 8.45% per annum, and maturing from
January 28, 1998, through October 10, 1999. The maturities of the
available-for-sale securities do not exceed two years.
CONTINUED
38
<PAGE> 39
CARDIOGENESIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
-------
2. Available-for-Sale Securities, continued:
The amortized cost and fair value of available-for-sale securities at
December 31, 1997 and 1996 are as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
---------------------------------------------- ----------------------------
Amortized Unrealized Fair Amortized Fair
Cost Gain Value Cost Value
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
U.S. Government securities $ 8,491 $ 19 $ 8,510 $ 26,446 $ 26,446
Corporate obligations 25,958 20 25,978 29,682 29,682
---------- ---------- ---------- ---------- ----------
$ 34,449 $ 39 $ 34,488 $ 56,128 $ 56,128
========== ========== ========== ========== ==========
</TABLE>
3. Inventories:
Inventories consisted of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
---------------------------
1997 1996
----------- -----------
<S> <C> <C>
Raw materials $ 736 $ 20
Finished goods 373 1,088
----------- -----------
$ 1,109 $ 1,108
=========== ===========
</TABLE>
4. Property and Equipment:
Property and equipment consisted of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
------------------------
1997 1996
---------- -----------
<S> <C> <C>
Computer equipment $ 520 $ 403
Laboratory equipment 514 430
Furniture and equipment 698 447
Leasehold improvements 540 731
---------- -----------
2,272 2,011
Less accumulated depreciation and amortization 743 465
---------- -----------
$ 1,529 $ 1,546
========== ===========
</TABLE>
CONTINUED
39
<PAGE> 40
CARDIOGENESIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
-------
5. Accrued Expenses:
Accrued expenses consisted of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
------------------------
1997 1996
---------- -----------
<S> <C> <C>
Clinical Patient Research $ 1,074 $ 333
Contract Research 231 266
Consulting 275
Distributors 400
Legal 358 176
Employee Stock Purchase Plan 73 72
Other 92 174
---------- -----------
$ 1,828 $ 1,696
========== ===========
</TABLE>
6. Commitments and Contingencies:
FACILITY LEASE:
The Company leases its Sunnyvale, California facility under a
noncancelable operating lease expiring in October 1999. In addition to
monthly rent, the lease is subject to additional payments for utilities
and other costs above the base amounts. The Company has the option to
extend the term of this lease for an additional five years upon all of
the same terms and conditions except base rent.
Future minimum lease payments are as follows at December 31, 1997 (in
thousands):
<TABLE>
<CAPTION>
<S> <C>
1998 $ 191
1999 160
---------
$ 351
=========
</TABLE>
CONTINUED
40
<PAGE> 41
CARDIOGENESIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
-------
6. Commitments and Contingencies, continued:
FACILITY LEASE, continued:
Rent expense for the years ended December 31, 1997, 1996 and 1995 was
$229,000, $229,000 and $65,000, respectively.
RESEARCH AGREEMENT:
The Company, in its acquisition of technology in 1993, assumed certain
obligations under an ongoing research and development agreement with
Columbia University (Columbia). The agreement provides for a license
fee of $1.5 million to be paid to Columbia on the date the technology
licensed under the agreement meets all the following conditions:
marketing approval from the FDA; issuance of a United States patent for
the product; and demonstration of the manufacturability of the product.
The Company must pay a royalty to Columbia of 1.4% of all net revenues
from sales of the products subject to the license beginning twelve
months preceding the issuance of the first United States patent. A
royalty of 50% is required for all sublicense revenue. The agreement
allows for cumulative research payments under the agreement to be
deducted from future royalty payments required. Previous payments under
the agreement made by the Company and the assignor to Columbia which
would reduce future royalties for product sales have been expensed, as
incurred, as research and development expenses.
The Company has agreements to pay consultants and institutions $655,000
for various research and development efforts in 1998.
LITIGATION:
The Company is a party to various legal actions that have occurred in
the normal course of business. In the opinion of management, the
outcome of these actions will not have a material effect on the
financial position, cash flows, or results of operations of the
Company.
7. Stockholders' Equity
COMMON STOCK:
At December 31, 1997, the Company had 40 million shares of common stock
authorized. In April 1996, the Company reincorporated in the State of
Delaware. The financial statements have been retroactively adjusted to
reflect the reincorporation. In April 1996, the Company had a 4.1-for-5
reverse stock split of the Company's common and preferred stock. The
financial statements have been retroactively restated to give effect to
the split.
CONTINUED
41
<PAGE> 42
CARDIOGENESIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
-------
7. Stockholders' Equity, continued:
EMPLOYEE STOCK PURCHASE PLAN:
In April 1996, the Board of Directors adopted the 1996 Employee Stock
Purchase Plan and reserved 123,000 shares of common stock for issuance
under the Plan. The Plan provides for consecutive 24 month offering
periods. Each offering period is comprised of four six month purchase
periods. Shares are purchased through employees' payroll deductions at
exercise prices equal to 85% of the lesser of the fair market value of
the Company's common stock at either the first day of the applicable
offering period or the last day of the respective purchase period.
17,000 shares had been issued under this plan as of December 31, 1997.
STOCK OPTION PLANS:
In November 1993, the Company established the 1993 Equity Incentive
Plan (the 1993 Plan) that, as amended in 1995, authorized the Board of
Directors to grant 1,640,000 incentive and nonstatutory stock options
to employees, officers, directors and consultants of the Company. The
Plan expires in 2003.
In April 1996, the Company adopted the 1996 Equity Incentive Plan (the
1996 Plan). Pursuant to the provisions of this plan, the Board of
Directors may grant incentive and nonstatutory stock options to
employees, officers, directors and consultants of the Company. At
December 31, 1997, there were 1,120,000 shares reserved for issuance
under this plan. The Plan expires in 2006.
Additionally in April 1996, the Company adopted the 1996 Directors
Stock Option Plan. Only nonstatutory stock options may be granted under
this plan, and only to non-employee directors of the company. At
December 31, 1997, there were 98,000 shares reserved for issuance under
this plan. The Plan expires in 2006.
CONTINUED
42
<PAGE> 43
CARDIOGENESIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
-------
7. Stockholders' Equity, continued:
STOCK OPTION PLANS, continued:
Under the Plans, options must be granted at not less than the fair
market value at the date of grant as determined by the Board of
Directors, or committee thereof, except for options granted to a person
owning greater than 10% of the total combined voting power of all
classes of stock of the Company, for which the exercise price of the
options must be not less than 110% of the fair market value at the time
of grant as determined by the Board of Directors or committee thereof
and nonstatutory stock options, for which the exercise price of the
options must not be less than 85% of the fair market value at the time
of grant as determined by the Board of Directors or committee thereof.
The Board of Directors, or committee thereof, has the authority to set
the term of the options (no longer than ten years from the date of
grant, five years for greater than 10% owners of voting stock). Under
the Plans, options generally vest at a rate of 25% annually after the
vesting commencement date.
Activity under the Plans is set forth below (in thousands, except per
share data):
<TABLE>
<CAPTION>
Options Outstanding
Shares ------------------------------------------------
Available Number
for of Exercise Aggregate
Grant Shares Price Price
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Balances, January 1, 1995 740 531 $0.12-$0.24 $ 82
Additional shares
reserved by plan amendment 369
Options granted (813) 813 $0.24-$0.61 233
Options canceled 8 (8) $0.24 (2)
------------ ------------ ------------
Balances, December 31, 1995 304 1,336 $0.12-$0.61 313
Additional shares
reserved by plan amendment 918
Options granted (646) 646 $0.61-$14.50 5,161
Options canceled 75 (75) $0.12-$14.50 (648)
Options exercised (409) $0.12-$1.83 (75)
------------ ------------ ------------
Balances, December 31, 1996 651 1,498 $0.12-$14.50 4,751
Additional shares
reserved by plan amendment 300
Options granted (1,318) 1,318 $6.50-$15.25 10,153
Options canceled 692 (692) $0.12-$15.25 (7,032)
Options exercised (83) $0.12-$10.75 (76)
------------ ------------ ------------
Balances, December 31, 1997 325 2,041 $0.12-$14.50 $ 7,796
============ ============ ============
</TABLE>
CONTINUED
43
<PAGE> 44
CARDIOGENESIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
-------
7. Stockholders' Equity, continued:
STOCK OPTION PLANS, continued:
In December 1997, the Company offered employees the right to cancel
certain outstanding stock options and receive new options with an
exercise price of $6.50 per share, the closing price of the common
stock on the date individual employees agreed to cancel their original
outstanding stock options. Options to purchase a total of 502,000
shares at original exercise prices ranging from $7.25 to $15.25 per
share were canceled and new options were issued in December 1997. The
option term and vesting under the new options are identical to the
terms of the canceled options.
The options outstanding and currently exercisable by exercise price at
December 31, 1997 are as follows (in thousands, except per share data):
<TABLE>
<CAPTION>
Options Currently
Options Outstanding Exercisable
------------------------------------------------ ---------------------
Weighted
Average Weighted Weighted Average
Remaining Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
----------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
$0.12-$0.24 751 7.13 $0.22 511 $0.21
$0.61-$0.61 160 8.00 $0.61 73 $0.61
$1.83-$1.83 149 8.17 $1.83 75 $1.83
$6.50-$14.50 981 9.32 $7.25 196 $8.16
----- ----
2,041 855
===== ====
</TABLE>
At December 31, 1997, options to purchase 855,000 shares were
exercisable at an average exercise price of $2.21 per share and
2,041,000 shares of common stock are reserved in the event of options
exercised.
Deferred compensation to be recognized as a result of stock options
granted and preferred stock issued during 1996 and 1995 totaled $1.4
million and $874,000 respectively. Amortization of deferred
compensation is generally over a vesting period of four years, with
compensation expense recognized in the period ended December 31, 1997,
1996 and 1995 of $480,000, $849,000 and $104,000 respectively.
CONTINUED
44
<PAGE> 45
CARDIOGENESIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
-------
7. Stockholders' Equity, continued:
STOCK-BASED COMPENSATION:
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123 (SFAS No. 123), "Accounting for
Stock-Based Compensation." Accordingly, no compensation cost has been
recognized for the Plans (including the Employee Stock Purchase Plan).
Had compensation cost for the Plans been determined based on the fair
value at the grant date for awards in 1997, 1996 and 1995 consistent
with the provisions of SFAS No. 123, the Company's net loss and net
loss per common share and per common share-assuming dilution for the
years ended December 31, 1997, 1996 and 1995 would have been increased
to the pro forma amounts indicated below (in thousands, except per
share data):
<TABLE>
<CAPTION>
Year Ended
December 31,
---------------------------------------------
1997 1996 1995
----------- ---------- ----------
<S> <C> <C> <C>
Net loss - as reported $ (17,971) $ (8,800) $ (5,299)
=========== ========== ==========
Net loss - pro forma $ (19,800) $ (9,258) $ (5,318)
=========== ========== ==========
Net loss per common share and per
common share-assuming dilution - as
reported
$ (1.49) $ (1.18) $ --
=========== ========== ==========
Net loss per common share and per
common share-assuming dilution -
pro forma $ (1.65) $ (1.25) $ --
=========== ========== ==========
</TABLE>
The above pro forma disclosures are not necessarily representative of
the effects on reported net income or loss for future years.
CONTINUED
45
<PAGE> 46
CARDIOGENESIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
-------
7. Stockholders' Equity, continued:
STOCK-BASED COMPENSATION, continued:
The fair value of each option grant is estimated on the date of grant
using the minimum value method (prior to the IPO) and the Black-Scholes
method (subsequent to the IPO) with the following weighted average
assumptions by subgroup:
<TABLE>
<CAPTION>
Option Plans Stock
-------- -------- Purchase
Group A Group B Plan
-------- -------- --------
<S> <C> <C> <C>
Risk-free interest rate 6.48% 5.86% 5.32%
Expected life 4.23 4.54 0.5
Expected dividends $ -- $ -- $ --
Expected volatility 0.7633 0.7633 0.7633
</TABLE>
The weighted average expected life was calculated based on the vesting
period and the exercise behavior of each subgroup. Group A represents
higher paid employees, while Group B represents lower paid employees.
The risk-free interest rate was calculated in accordance with the grant
date and expected life calculated for each subgroup.
8. Income Taxes:
At December 31, 1997 and 1996, the components of deferred tax assets
are as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Intangible assets $ (4) $ 40
Depreciation 39 6
Tax credits 972 229
Accrued expenses and other 471 219
Capitalized research and development 676 628
Deferred revenue -- 111
Net operating loss carryforwards 11,636 4,779
------ -----
Net deferred tax assets 13,790 6,012
Less valuation allowance (13,790) (6,012)
------ ------
$ -- $ --
====== ======
</TABLE>
The Company had federal and state net operating loss carryforwards of
approximately $32.5 million and $10.0 million, respectively, at December
31, 1997, available to offset future regular and alternative minimum
taxable income. The Company's federal and state net operating loss
carryforwards will expire by the years 2012 and 2002, respectively.
The Tax Reform Act of 1986 substantially changed the rules relative to
net operating loss carryforwards in the event of an "ownership change" of a
corporation. Future changes in ownership may result in limitations on the
annual utilization of net operating loss carryforwards.
9. Related Party Transactions:
The Company paid $113,000, $159,000, and $178,000 for consulting fees
to certain stockholders during the years ended December 31, 1997, 1996 and
1995, respectively.
CONTINUED
46
<PAGE> 47
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
- none -
PART III
ITEM 10. DIRECTORS AND EXECUTIVES OFFICERS OF THE REGISTRANT
The information required by this item with respect to the directors of
the Company is incorporated by reference from the definitive proxy statement for
the Company's 1998 annual meeting of stockholders to be filed with the
Commission pursuant to Regulation 14A not later than 120 days after the end of
the fiscal year covered by this report (the "Proxy Statement") under the caption
"Proposal No. 1-Election of Directors." The information relating to the
executive officers of the Company is incorporated by reference from the Proxy
Statement under the caption "Executive Officers."
Information required by this item with respect to compliance with
Section 16(a) of the Securities Exchange Act of 1934 is incorporated by
reference from the Proxy Statement under the caption "Section 16(a) Beneficial
Ownership Reporting Compliance."
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from
the Proxy Statement under the captions "Executive Compensation," "Proposal No.
1-Election of Directors-Director Compensation," and "Compensation Committee
Interlocks and Insider Participation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference from
the Proxy Statement under the caption "Security Ownership of Certain Beneficial
Owners and Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference from
the Proxy Statement under the caption "Certain Relationships and Related
Transactions."
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Form:
1. Index to Financial Statements
-----------------------------
The Consolidated Financial Statements, notes thereto, and Independent
Accountant's Report thereon are included in Part II, Item 8 of this Form
10-K.
2. Financial Statement Schedule
The Financial Statement Schedule is included in Part II, Item 8 of this
Form 10-K.
3. Exhibits
The following exhibits are filed or incorporated by reference as part of
this Form 10-K:
EXHIBIT
NUMBER EXHIBIT TITLE
------- -----------------------------------------------------------
3.01 Restated Certificate of Incorporation.(4)
3.02 Registrant's Bylaws.(1)
4.01 Form of Specimen Certificate for Registrant's Common
Stock.(1)
4.02 Registrant's Second Restated Investors' Rights Agreement,
dated as of December 5, 1995 as amended.(1)
10.01 Registrant's 1993 Equity Incentive Plan and related
documents.(1)*
10.02 Registrant's 1996 Equity Incentive Plan and related
documents.(1)(3)*
10.03 Registrant's 1996 Directors Stock Option Plan and related
documents.(1)*
10.04 Registrant's 1996 Employee Stock Purchase Plan and related
documents.(1)*
10.05 Standard Industrial/Commercial Multi-Tenant Lease, dated
December 18, 1995, by and between Registrant and De La Cruz
Enterprises.(1)
10.06 Koll Business Center Lease, dated July 13, 1994, by and
between Registrant and Fujita California Partners III.(1)
10.07 Form of Indemnity Agreement.(1)*
10.08 Agreement, dated August 1, 1991, by and among the Trustees
of Columbia University in the City of New York, Eli Lilly
and Company and Advanced Cardiovascular Systems, Inc. and
related documents.(1)(2)
10.09 OEM Supply Agreement, dated May 31, 1995, by and between
Registrant and New Star Lasers as amended.(1)(2)
10.10 Research and Development Agreement, dated June 1, 1995, by
and between Registrant and New Star Lasers.(1)(2)
10.11 Product Documentation, Approval, Manufacturing and Supply
Agreement, dated January 2, 1996, by and between Registrant
and Indigo Medical GmbH.(1)(2)
10.12 Consulting Agreement, dated March 1, 1996, by and between
Registrant and Michael Aita.(1)(2)*
10.13 Employment Terms Letter, dated November 23, 1993, issued
by the Company to Michael Aita.(1)*
10.14 Consulting Agreement, dated November 23, 1993, by and among
Registrant, Carl J. Simpson and Advanced Cardiovascular
systems, Inc. as amended.(1)*
10.15 International Distribution Agreement, dated January 22,
1997, by and between Registrant and Boston Scientific
Corporation.**(2)(5)
10.16 OEM Product Development and Supply Agreement, dated
March 10, 1997, between Registrant and Carl Baasel
Lasertechnik GmbH.**
23.01 Consent of Coopers & Lybrand, L.L.P., independent
accountants.
27.01 Financial Data Schedule.
27.02 Restated Financial Data Schedule for Nine Months Ended
September 30, 1997.
27.03 Restated Financial Data Schedule for Six Months Ended
June 30, 1997.
27.04 Restated Financial Data Schedule for Three Months Ended
March 31, 1997.
27.05 Restated Financial Data Schedule for Twelve Months Ended
December 31, 1996.
27.06 Restated Financial Data Schedule for Nine Months Ended
September 30, 1996.
27.07 Restated Financial Data Schedule for Six Months Ended
June 30, 1996.
- -------------------
* Management contract or compensatory arrangement.
** Confidential treatment has been requested with respect to certain portions
of this exhibit. Confidential portions have been filed separately with the
Securities and Exchange Commission.
(1) Incorporated by reference to the Exhibits to Registrant's Registration
Statement on Form SB-2 (No. 333-3752-LA), declared effective on May 21, 1996
(the "Form SB-2").
(2) Confidential treatment has been granted with respect to certain portions of
this agreement. Such portions have been omitted from this filing and have
been filed separately with the Securities and Exchange Commission.
(3) Incorporated by reference to the Exhibit 10.20 of Registrant's quarterly
report on Form 10-Q for the quarter ended September 30, 1997.
(4) Incorporated by reference to the Exhibit 3.01 of Registrant's annual report
on Form 10-K for the fiscal year ended December 31, 1996.
(5) Incorporated by reference to the Exhibit 10.19 of Registrant's quarterly
report on Form 10-Q for the quarter ended June 30, 1997.
(b) Reports on Form 8-K
-------------------
None
(c) Exhibits
--------
See Item 14(a) above.
(d) Financial Statement Schedule
----------------------------
See Item 14(a) above.
47
<PAGE> 48
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
In connection with our audits of the consolidated financial statements
of CardioGenesis Corporation as of December 31, 1997 and 1996, and for each of
the three years in the period ended December 31, 1997, which financial
statements are included in this Annual Report on Form 10-K, we have also audited
the financial statement schedule listed in Item 8 herein.
In our opinion, the financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly, in
all material respects, the information required to be included therein.
COOPERS & LYBRAND L.L.P.
San Jose, California
January 30, 1998
48
<PAGE> 49
(Schedule II)
CARDIOGENESIS CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
<TABLE>
<CAPTION>
Balance at
Beginning Charged to Balance at
of the Costs and End of the
Description Period Expenses Deductions Period
- -------------------------------------------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Balance for the year ended December 31, 1995:
Allowance for doubtful accounts receivable $0 $0
Balance for the year ended December 31, 1996:
Allowance for doubtful accounts receivable $0 $225 -- $225
Balance for the year ended December 31, 1997:
Allowance for doubtful accounts receivable $225 $207 $(382) $ 50
</TABLE>
49
<PAGE> 50
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CARDIOGENESIS CORPORATION
By: /s/ ALLEN W. HILL
----------------------------
Allen W. Hill
President and Chief Executive Officer
Date: March 31, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- ---------------------------- ---------------------------- ---------------
<S> <C> <C>
/s/ ALLEN W. HILL President, Chief Executive March 31, 1998
- ------------------------- Officer and a Director
Allen W. Hill (Principal Executive Officer)
/s/ RICHARD P. POWERS Chief Financial Officer, March 31, 1998
- ------------------------- Vice President of Finance
Richard P. Powers and Administration and Secretary
(Principal Financial Officer and
Principal Accounting Officer)
/s/ DAVID B. APFELBERG Director March 31, 1998
- -------------------------
David B. Apfelberg
/s/ JACK M. GILL Director March 31, 1998
- -------------------------
Jack M. Gill
/s/ DAVID C. HULL, JR. Director March 31, 1998
- -------------------------
David C. Hull, Jr.
/s/ THOMAS D. KILEY Director March 31, 1998
- -------------------------
Thomas D. Kiley
/s/ E. WALTER LANGE Director March 31, 1998
- -------------------------
E. Walter Lange
/s/ ROBERT C. STRAUSS Director March 31, 1998
- -------------------------
Robert C. Strauss
</TABLE>
50
<PAGE> 51
EXHIBIT INDEX
EXHIBIT
NUMBER EXHIBIT TITLE
------- -----------------------------------------------------------
3.01 Restated Certificate of Incorporation.(4)
3.02 Registrant's Bylaws.(1)
4.01 Form of Specimen Certificate for Registrant's Common
Stock.(1)
4.02 Registrant's Second Restated Investors' Rights Agreement,
dated as of December 5, 1995 as amended.(1)
10.01 Registrant's 1993 Equity Incentive Plan and related
documents.(1)*
10.02 Registrant's 1996 Equity Incentive Plan and related
documents.(1)(3)*
10.03 Registrant's 1996 Directors Stock Option Plan and related
documents.(1)*
10.04 Registrant's 1996 Employee Stock Purchase Plan and related
documents.(1)*
10.05 Standard Industrial/Commercial Multi-Tenant Lease, dated
December 18, 1995, by and between Registrant and De La Cruz
Enterprises.(1)
10.06 Koll Business Center Lease, dated July 13, 1994, by and
between Registrant and Fujita California Partners III.(1)
10.07 Form of Indemnity Agreement.(1)*
10.08 Agreement, dated August 1, 1991, by and among the Trustees
of Columbia University in the City of New York, Eli Lilly
and Company and Advanced Cardiovascular Systems, Inc. and
related documents.(1)(2)
10.09 OEM Supply Agreement, dated May 31, 1995, by and between
Registrant and New Star Lasers as amended.(1)(2)
10.10 Research and Development Agreement, dated June 1, 1995, by
and between Registrant and New Star Lasers.(1)(2)
10.11 Product Documentation, Approval, Manufacturing and Supply
Agreement, dated January 2, 1996, by and between Registrant
and Indigo Medical GmbH.(1)(2)
10.12 Consulting Agreement, dated March 1, 1996, by and between
Registrant and Michael Aita.(1)(2)*
10.13 Employment Terms Letter, dated November 23, 1993, issued
by the Company to Michael Aita.(1)*
10.14 Consulting Agreement, dated November 23, 1993, by and among
Registrant, Carl J. Simpson and Advanced Cardiovascular
systems, Inc. as amended.(1)*
10.15 International Distribution Agreement, dated January 22,
1997, by and between Registrant and Boston Scientific
Corporation.**(2)(5)
10.16 OEM Product Development and Supply Agreement, dated
March 10, 1997, between Registrant and Carl Baasel
Lasertechnik GmbH.**
23.01 Consent of Coopers & Lybrand, L.L.P., independent
accountants.
27.01 Financial Data Schedule.
27.02 Restated Financial Data Schedule for Nine Months Ended
September 30, 1997.
27.03 Restated Financial Data Schedule for Six Months Ended
June 30, 1997.
27.04 Restated Financial Data Schedule for Three Months Ended
March 31, 1997.
27.05 Restated Financial Data Schedule for Twelve Months Ended
December 31, 1996.
27.06 Restated Financial Data Schedule for Nine Months Ended
September 30, 1996.
27.07 Restated Financial Data Schedule for Six Months Ended
June 30, 1996.
- -------------------
* Management contract or compensatory arrangement.
** Confidential treatment has been requested with respect to certain portions
of this exhibit. Confidential portions have been filed separately with the
Securities and Exchange Commission.
(1) Incorporated by reference to the Exhibits to Registrant's Registration
Statement on Form SB-2 (No. 333-3752-LA), declared effective on May 21, 1996
(the "Form SB-2").
(2) Confidential treatment has been granted with respect to certain portions of
this agreement. Such portions have been omitted from this filing and have
been filed separately with the Securities and Exchange Commission.
(3) Incorporated by reference to the Exhibit 10.20 of Registrant's quarterly
report on Form 10-Q for the quarter ended September 30, 1997.
(4) Incorporated by reference to the Exhibit 3.01 of Registrant's annual report
on Form 10-K for the fiscal year ended December 31, 1996.
(5) Incorporated by reference to Exhibit 10.19 of Registrant's quarterly report
on Form 10-Q for the quarter ended June 30, 1997.
51
<PAGE> 1
** CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO CERTAIN INFORMATION
CONTAINED IN THIS DOCUMENT. CONFIDENTIAL PORTIONS (MARKED [**] HAVE BEEN
OMITTED FROM THE PUBLIC FILING AND HAVE BEEN FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION.
EXHIBIT 10.16
OEM PRODUCT
DEVELOPMENT AND SUPPLY AGREEMENT
This Agreement (the "Agreement") is entered into effective as of March
10, 1997 (the "Effective Date") by and between CardioGenesis Corporation
("CardioGenesis"), a Delaware corporation, and Carl Baasel Lasertechnik GmbH, a
corporation organized under the laws of Germany ("Baasel").
R E C I T A L S
A. CardioGenesis has undertaken considerable efforts in the application
of lasers, and particularly holmium:YAG ("Ho:YAG") lasers, in conjunction with a
medical treatment called transmyocardial revascularization ("TMR"), and holds
certain patents and patent applications in relation thereto, especially with
respect to the use of catheters for directing laser energy to the heart.
B. CardioGenesis is in the process of establishing its business
worldwide, including sales of its products for TMR uses to customers such as,
but not limited to, hospitals, catheter laboratories and other appropriate
medical products end-users.
C. The CardioGenesis Products, as defined below, currently include a
laser, which currently is a Ho:YAG laser.
D. Baasel has certain expertise with respect to the generation and
control of high power laser pulses, and has extensive experience in the
development and manufacture of both industrial and medical solid state lasers,
and especially of Ho:YAG lasers, and holds certain patents and patent
applications in relation thereto.
E. CardioGenesis desires to partake of such experience and expertise of
Baasel, and Baasel desires to cooperate with CardioGenesis, under the terms and
conditions of this Agreement, in order: (1) to allow for the development by
Baasel, in cooperation with CardioGenesis, of a laser, based upon an existing
laser product of Baasel, which will be suitable, as a result of such
development, for use in and as a part of CardioGenesis Products, worldwide in
the CardioGenesis Use, as hereinafter defined, and (2) to allow for manufacture
and sale to CardioGenesis by Baasel, on an original equipment manufacturer (OEM)
basis, of such developed laser product, as provided herein.
Now, therefore, in consideration of the mutual covenants contained in
this Agreement, CardioGenesis and Baasel agree as follows:
1. OEM PRODUCT DEVELOPMENT.
(a) General. The parties acknowledge that at the request of, and
with the cooperation of, CardioGenesis, Baasel has undertaken, and CardioGenesis
has funded, prior to the Effective Date, and, at the request of CardioGenesis,
Baasel may continue during all or a part of the term hereof, research and
development efforts (such efforts both before the Effective Date and during the
term hereof referred to herein as the "Development Efforts") intended to allow
the manufacture of a laser (the "OEM Product"), described generally on Exhibit A
attached hereto and incorporated herein by reference, that will meet the
specifications for such OEM Product as set forth on Exhibit A hereto, including
without limitation specifications related to approval of
<PAGE> 2
the OEM Product as may be required under regulations of the U.S. Food & Drug
Administration (the "FDA") and other applicable U.S. and international
regulatory standards and requirements. The parties acknowledge that the OEM
Product will be a key component in CardioGenesis' laser-based surgical products,
as they now exist and as they may exist in the future, including systems
consisting of various component products or subassemblies (collectively, the
"CardioGenesis Products"), for use worldwide in all cardiothoracic human and
animal applications and/or involving pulsing of the laser, including without
limitation TMR (such use generically referred to herein as the "CardioGenesis
Use"), and as spares and replacements for CardioGenesis Products incorporating
such OEM Product.
(b) OEM Product Development Program; OEM Product Specifications;
Change of OEM Product Specifications by CardioGenesis.
(i) OEM Product Development Program. Commencing on the
Effective Date, Baasel will continue, and CardioGenesis will, subject to the
further terms and conditions of this Agreement, pay for, such further research
and development work during the term hereof as CardioGenesis determines in good
faith to be necessary to finalize the OEM Product and to make the OEM Product
commercially salable by CardioGenesis as incorporated into CardioGenesis
Products. Such research and development work will be conducted pursuant to the
Development Program described in Exhibit B attached hereto and incorporated
herein by reference (the "Schedule"), including the Phases set forth therein
(each a "Phase"). Baasel will use its good faith best efforts to complete each
of the Phases set forth in Exhibit B hereto. At the completion of each Phase of
the Development Program, CardioGenesis will have the sole right to determine
whether the Development Program will continue. CardioGenesis will immediately
notify Baasel in writing of CardioGenesis' determination to continue, or not to
continue, the Development Program.
(ii) OEM Product Specifications. The specifications for
the OEM Product as set forth in Exhibit A hereto were arrived at by mutual
consensus of Baasel and CardioGenesis, and include, as attached to and included
in Exhibit A, Baasel's specification offer documents denoted as MD0230/96 and
MD0254/96 (the "Baasel Proposed Specifications"), and CardioGenesis'
specification response documents denoted as DS000701 and DS000801 (the
"CardioGenesis Proposed Specifications"). In the event of a conflict between the
contents of the Baasel Proposed Specifications and the CardioGenesis Proposed
Specifications, the CardioGenesis Proposed Specifications will control. In the
event of a conflict between the contents of the Baasel Proposed Specifications
and/or the CardioGenesis Proposed Specifications, on the one hand, and remaining
contents of Exhibit A, on the other hand, such remaining contents of Exhibit A
will control.
(iii) Change of OEM Product Specifications By
CardioGenesis. If CardioGenesis changes the specifications or requirements for
the OEM Product from those set forth in Exhibit A hereto in a manner that is, in
Baasel's good faith judgment after consultation with CardioGenesis, materially
different from the specifications and requirements for the OEM Product as set
forth in Exhibit A hereto, Baasel may request that CardioGenesis and Baasel
execute an amendment of Exhibit B hereto to reflect a commercially reasonable
adjustment of the payments to be made by CardioGenesis for such research and
development work, to account for such changes. CardioGenesis will consider such
request in good faith. If the parties reach agreement on such adjustment of
payments, they will reflect such agreement in a mutually-
-2-
<PAGE> 3
signed amendment to Exhibit B hereto. If the parties do not reach agreement in
writing on such adjustment of payments, [ ** ]
(iv) Materially Increased Actual Cost of Development
Efforts. If, in the course of performing the Development Efforts, the actual
amount expended by Baasel to complete the Development Efforts, as set forth in
Exhibit B hereto, exceeds [ ** ], then the parties will negotiate in good faith
for a commercially reasonable increase in such total of payments. If the parties
reach agreement on such increased amount, they will so reflect it in a written
amendment to Exhibit B hereto. If the parties do not reach such agreement, then
either party may immediately terminate this Agreement by written notice to the
other.
(c) Payment by CardioGenesis To Baasel For the Development
Efforts. The amount to be paid by CardioGenesis to Baasel for Baasel's work in
the Development Efforts from and after the Effective Date, if the relevant Phase
has been successfully completed by meeting the technical specifications set
forth on Exhibit B hereto upon for such Phase, is set forth for such Phase on
Exhibit B hereto; provided, however, that payment by CardioGenesis for the [ **
] units of commercial production OEM Product to be ordered by CardioGenesis in
its Initial Order (as provided and defined in Section 5(b) hereof) will be paid
for as provided in Section 5(b) hereof, is not included in such payment for the
Development Efforts. CardioGenesis will pay to Baasel the relevant amount
required under Exhibit B within forty-five (45) days after the date of delivery
by Baasel to CardioGenesis of the deliverable under Exhibit B to which such
payment relates. The payment by CardioGenesis to Baasel of the relevant payment
for each Phase as provided herein will be the entire payment of CardioGenesis to
Baasel for the Development Efforts. Baasel acknowledges receipt of a total of [
** ] in cash from CardioGenesis prior to the Effective Date for Development
Efforts undertaken by Baasel at CardioGenesis' request prior to the Effective
Date. Such advance payment will be credited against any amount due from
CardioGenesis to Baasel at the completion of Phase 4 or as a result of and
following any termination of this Agreement by CardioGenesis prior to completion
of the Development Efforts.
(d) Expenses; Project Manager and Project Engineer.. The parties
will pay their own respective expenses in performance of their obligations
hereunder, provided that the reasonable travel and lodging expenses of Baasel
personnel in connection with the review provided for in Section 1(f) hereof will
be paid by CardioGenesis, and provided that CardioGenesis will pay or will at
Baasel's written request accompanied by an invoice therefor in reasonable
detail, reimburse Baasel for, over the course of the Development Efforts:
(i) Project Manager. A total of up to [ ** ], for the
aggregate amount of Baasel's costs, including consulting fees and reasonable
travel and lodging and other customary incidental costs, while working on the
Development Efforts, of a Project Manager who will be a consultant acceptable to
-3-
<PAGE> 4
CardioGenesis, which acceptance will not be unreasonably withheld or delayed,
and who will be supplied by Baasel for the Development Efforts, provided that
the parties will discuss and negotiate in good faith, and will reflect any
agreement between them in writing as an amendment to this Agreement, as to any
increases in the amount provided above for the Project Manager if, in the good
faith judgment of Baasel, such amount needs to be increased to assist the
Development Efforts; and
(ii) Project Engineer. Up to a total of [ ** ] for the
salary and Baasel's customary general and administrative overhead costs related
thereto, and reasonable travel and lodging and other customary incidental costs,
but no other costs or charges, while working on the Development Efforts, of a
Project Engineer who will be supplied by Baasel for the Development Efforts.
Such amount will be paid in [ ** ] installments of [ ** ] each, one of which
will be paid to Baasel at the same time as the payment for the Development
Efforts that is due to be paid under Exhibit B hereto next after the Effective
Date, and the second of which will be paid to Baasel at the same time as the
next succeeding payment for the Development Efforts that is due to be paid under
Exhibit B hereto.
At CardioGenesis' reasonable and good faith request,
Baasel will supply, or will cause the Project Manager and/or the Project
Engineer to supply, to CardioGenesis customary receipts and records of such
travel and lodging costs appropriate for CardioGenesis' accounting and income
tax supporting documentation purposes.
(e) Certain Reimbursement by CardioGenesis to Baasel. Pursuant to
the Schedule, the starting and scheduled final points of the Phases will overlap
each other. In consideration of Baasel ordering long-lead items for use in such
Phases and of the overlapping of such Phases, upon any such early termination by
either party, CardioGenesis will reimburse Baasel all reasonable expenses,
including, but not limited to development, material and labor costs (at Baasel's
then current hourly rates for development engineers) through such termination,
and for all penalties and amounts required to be paid by Baasel under agreements
by Baasel with third parties which Baasel cannot cancel without such penalty or
payment applying. Baasel will use its diligent efforts to effect such required
cancellations without penalty.
(f) Cooperation. The parties will cooperate in good faith to
attempt to allow the completion of the Development Efforts according to the
Schedule, and to allow Baasel to meet each Phase fully. In connection therewith,
the parties will cooperate with each other, each at their own respective
expense, provided that the costs required of Baasel for any such action are in
reasonable relation to the amount of work that has been then undertaken by
Baasel in the Development Efforts, with respect to all commercially reasonable
requests made in good faith by one party to the other concerning documentation,
and execution and delivery by the other party of documents and instruments to
obtain, preserve and protect the proprietary rights of the requesting party,
including, without limitation, actions in connection with patent, trademark,
copyright and mask work registration and prosecution. The primary liaison person
for Baasel initially will be Dr. Werner Falkenstein. The primary liaison person
for CardioGenesis initially will be Dr. Kenneth Aron. The parties will promptly
notify each other in writing of any change during the term of this Agreement in
such primary liaison personnel designations. Members of the Baasel technical
team that are designated by CardioGenesis in writing to Baasel will meet
-4-
<PAGE> 5
with CardioGenesis' technical staff at CardioGenesis' corporate headquarters to
perform the second design review of the OEM Product, at times mutually
convenient for the parties.
(g) New Developments by Baasel. During the term of this
Agreement, Baasel will:
(i) Awareness of New Developments. Keep CardioGenesis
apprised of new developments in Baasel products or technologies which have
potential application to the OEM Product, which disclosures will be subject to
the confidentiality provisions of Section 11 hereof, and
(ii) Availability of New Developments to CardioGenesis.
Make available such new developments for incorporation into the OEM Product,
subject to written agreement between CardioGenesis and Baasel as to such
incorporation into the OEM Product, and to commercially appropriate adjustments,
if any, in the purchase price for the OEM Product to CardioGenesis as the
parties may agree in writing by an amendment to Exhibit C attached hereto. All
such developments will remain the sole property of Baasel, and Baasel will not
be limited in the worldwide use of such developments, subject to such rights as
Baasel may grant in writing to CardioGenesis.
(h) Functional, Prototype and Pilot Units. Baasel will provide to
CardioGenesis the following [ ** ] units, each having the respective
specifications set forth for such relevant unit in Exhibit B hereto:
(i) Functional Units. [ ** ] functional pre-production
units of the OEM Product, with such housing as Baasel deems appropriate, [ ** ]
of which units will be shipped by Baasel to CardioGenesis Ex Works, as defined
in Incoterms 1990 ("Ex Works"), Starnberg, Germany, on or before March 12, 1997,
or as soon thereafter as possible if shipment cannot be made on March 12, 1997
due to carrier unavailability (Baasel will notify CardioGenesis in writing
promptly of any such unavailability, and of the revised expected shipment date),
and [ ** ] of which units will remain with Baasel in Germany; and
(ii) Prototype Units. [ ** ] prototype pre-production
units of the OEM Product, [ ** ] of which units will have Baasel Model BLM 1000
housings, will be shipped by Baasel on or before May 15, 1997 Ex Works
Starnberg, Germany, to CardioGenesis, and [ ** ] of which units, with the OEM
Product housing, will remain with Baasel in Germany; and
(iii) Pilot Units. [ ** ] pilot production units of the
OEM Product, each of which will have the OEM Product housing, will be shipped by
Baasel Ex Works Starnberg, Germany, to CardioGenesis as follows: [ ** ] units,
without the CE Mark marking, will be shipped on or before August 4, 1997, and [
** ] additional units, each with the CE Mark marking applied, will be shipped on
or before August 18, 1997.
Functional and prototype units may differ from the final
commercial production version of the OEM Product in appearance and assembly, but
will be representative of such final commercial production version of the OEM
Product in fit and function, and will have the general characteristics for such
functional and prototype units as are set forth in Exhibit B hereto or as
otherwise agreed in writing by the parties.
-5-
<PAGE> 6
The full payment by CardioGenesis to Baasel for all functional,
prototype and pilot units is included within the relevant payments made prior to
and after the Effective Date by CardioGenesis for the Development Efforts, and
CardioGenesis will not be liable for any other payment or charge for any such
functional prototype or pilot units.
(i) Modification of OEM Product. As required under regulations of
the FDA or under other applicable U.S. and international regulatory standards
and requirements, no engineering modifications will be initiated or implemented
by Baasel to the OEM Product without prior approval in writing by CardioGenesis,
provided that nothing herein will limit or prevent Baasel from initiating and
implementing such changes as Baasel desires to Baasel's products apart from the
OEM Product.
(j) Limitations on Baasel. In view of the investment by
CardioGenesis in development of the OEM Product, during the term of this
Agreement and for a period of one (1) year thereafter, Baasel will not make a
laser, or any major subassembly of a laser, that has been specifically designed
according to CardioGenesis' requirements for the CardioGenesis Use or in any
other way substantially similar, in the good faith and commercially reasonable
judgment of CardioGenesis, to the OEM Product, for supply to another party for
uses competitive with the CardioGenesis Use, and any such manufacture or supply
by Baasel after such one-year period will in any event be subject to the
provisions of this Agreement with respect to proprietary rights ownership by the
parties as provided in Section 2 hereof and to the parties' obligations of
confidentiality as provided in Section 11 hereof.
2. PROPRIETARY RIGHTS OWNERSHIP.
(a) Baasel Ownership. All Baasel Proprietary Information will
belong to Baasel, subject to the licenses granted herein to CardioGenesis. For
purposes of this Agreement, "Baasel Proprietary Information" means all
proprietary and confidential information and intellectual property rights of
Baasel related to and used for its laser products, including without limitation
Baasel Software and Updates as defined in Section 3(b)(ii) hereof, and all
intellectual property rights however arising, whether under trademark, trade
name, copyright, maskwork, patent or trade secret, and whether under statute or
common law, and whether applied for, pending or issued by any relevant
governmental authority, and whether belonging wholly to Baasel or whether
subject to license or other grant of rights either by Baasel as licensor or as
licensee, and as otherwise specifically set forth on Exhibit D hereto, but not
including any CardioGenesis Proprietary Information.
(b) CardioGenesis Ownership. All CardioGenesis Proprietary
Information and all OEM Product Improvements (each as hereinafter defined) will
belong to CardioGenesis, subject to the licenses granted herein to Baasel. For
purposes of this Agreement (i) "CardioGenesis Proprietary Information" is
defined as all proprietary and confidential information and intellectual
property rights, however arising, whether under trademark, trade name,
copyright, maskwork, patent or trade secret, and whether under statute or common
law, and whether applied for, pending or issued by any relevant governmental
authority, and whether belonging wholly to CardioGenesis or whether subject to
license or other grant of rights either by CardioGenesis as licensor or as
licensee, and as otherwise specifically set forth on Exhibit D
-6-
<PAGE> 7
hereto, but not including any Baasel Proprietary Information, in each case as
related to and used for the creation of OEM Product Improvements, and (ii) "OEM
Product Improvements" is defined as all modifications to Baasel's preexisting
laser products, as such laser products existed prior the commencement by Baasel
of the Development Efforts, including such work prior to and through the
Effective Date, and that may be undertaken during the term of this Agreement, as
part of the Development Efforts, in connection with allowing the production of
the OEM Product by Baasel with the specifications as may be agreed by Baasel in
writing pursuant to this Agreement that are desired and proposed by
CardioGenesis (alone, as opposed to such specifications as result from the
desires or requests of other customers of Baasel and which are, to the extent
lawfully permitted to Baasel, and with CardioGenesis' written consent in
defining the OEM Product specifications from time to time, included within the
OEM Product), and includes, without limitation, user manuals, service manuals,
and documents relating to software and hardware design modification and all
proprietary information and intellectual property as so developed.
(c) Cooperation. The parties will cooperate with each other, each
at their own expense, with respect to all commercially reasonable requests made
in good faith by one party to the other concerning documentation, and execution
and delivery by the other party of documents and instruments to obtain, preserve
and protect the proprietary rights of the requesting party, including, without
limitation, actions in connection with patent, trademark, copyright and mask
work registration and prosecution.
3. LICENSES BY CARDIOGENESIS AND BAASEL.
(a) Development and Manufacturing License From CardioGenesis to
Baasel. CardioGenesis hereby grants to Baasel a nonexclusive, nontransferable,
royalty-free license during the term of this Agreement, and with respect to
Baasel's work on the Development Efforts prior to the Effective Date, revocable
only for the failure of Baasel to perform its obligations under this Agreement,
to use CardioGenesis Proprietary Information (as defined in Section 2(b) hereof)
solely as necessary (i) with respect to work completed under the Development
Efforts by collaboration between CardioGenesis and Baasel, in order to attempt
to develop the OEM Product, and (ii) to undertake and complete further
development work on the OEM Product under the Development Efforts as is deemed
necessary by the parties hereto after the Effective Date, and (iii) to
manufacture and supply OEM Products and Parts to CardioGenesis pursuant to this
Agreement.
(b) License From Baasel to CardioGenesis For Certain Use of
Baasel Proprietary Information. The parties intend that all software of Baasel
that is necessary for the operation of the OEM Product, as such software may be
modified during the Development Efforts, will be embedded in the OEM Product, in
an electrically erasable programmable read-only memory integrated circuit
(EEPROM) or similar device. Therefore:
(i) General Grant of License. Baasel hereby grants to
CardioGenesis the following licenses, in each case including all rights
necessary in connection with the use by CardioGenesis, the customers of
CardioGenesis, and third-party licensees permitted under this Agreement, to
Baasel Software and Updates, as defined below:
-7-
<PAGE> 8
(A) Royalty-Free License. An exclusive,
royalty-free worldwide license in perpetuity, revocable only for the failure of
CardioGenesis to perform its obligations under this Agreement, with respect to
such Baasel Proprietary Information (as defined in Section 2(a) hereof) as is
necessary for the sale by CardioGenesis of OEM Products and Parts as
incorporated into CardioGenesis Products or on a stand-alone basis, including in
such license the right to use such Baasel Proprietary Information as is
necessary for training with respect to and maintenance of the OEM Product;
(B) Royalty-Bearing License. An exclusive,
worldwide license in perpetuity, revocable only for the failure of CardioGenesis
to perform its obligations under this Agreement, bearing the royalties set forth
in Section 10(b) hereof, with the right to sublicense to third party
manufacturers, for the manufacture and sale by CardioGenesis and/or by such
third parties, of OEM Products and/or Parts, including training with respect to
and maintenance of the OEM Products only while the Manufacturing License is in
use by CardioGenesis pursuant to the terms of Section 10(b) of this Agreement.
(ii) Software License From Baasel.
(A) License Grant. Subject to the terms and
conditions of this Agreement and limited to the CardioGenesis Use, Baasel hereby
grants CardioGenesis a nonexclusive, royalty-free worldwide license revocable
only for the failure of CardioGenesis to perform its obligations under this
Agreement (the "Baasel Software License") to:
(1) During the term of this Agreement, use
the proprietary software of Baasel ("Baasel Software") and error corrections,
updates, enhancements and/or other changes to Baasel Software (collectively, the
"Updates"), in each case as embedded in the OEM Product and/or in Parts, in
conjunction with the use of OEM Products, for CardioGenesis' internal purposes
only, in connection with CardioGenesis' distribution, demonstration, marketing
and support of the CardioGenesis Products, and of the OEM Products and Parts as
permitted by this Agreement;
(2) During the term of this Agreement, grant
to end-users of OEM Products and Parts, a nonexclusive nontransferable
sublicense to use Baasel Software as embedded in, and in conjunction with the
use of, OEM Products and Parts, which sublicense will survive the termination or
expiration of this Agreement; and
(3) Copy and distribute the Updates to
end-users of OEM Products and Parts as embedded therein.
(B) Updates. Baasel will provide to CardioGenesis a
master copy of Updates upon CardioGenesis' written request, and CardioGenesis
will pay such payment for such master copy production [ ** ]. CardioGenesis may
reproduce copies from the master copy solely for the purpose of distribution to
end-users of CardioGenesis Products and/or OEM Products and/or Parts, to be used
as embedded therein.
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(C) User Licensing. CardioGenesis will take all
commercially reasonable steps to protect Baasel's proprietary rights in Baasel
Software and Updates. If CardioGenesis licenses, under a separate software
license to its customers, any rights to CardioGenesis software in connection
with, and/or as embedded in, OEM Products and Parts, such license by
CardioGenesis will be prepared so as to apply to and equally protect Baasel
Software and Updates. If such separate license is used, then in the United
States and in the other jurisdictions where an enforceable copyright covering
Baasel Software and Updates exists, such license agreement may be a written
agreement signed by the customer or a written agreement in the package
containing Baasel Software and Updates or the user documentation for Baasel
Software and Updates that is fully visible to the customer and that the customer
accepts by opening the package, but in all other jurisdictions such agreement
must be a written agreement signed by the customer.
(D) Restrictions. Except as set forth in this
Agreement or as may be permitted in writing by Baasel, CardioGenesis will not
provide or otherwise make available Baasel Software or Updates or any part or
copies thereof to any third party nor use Baasel Software or Updates for any
purposes not specifically set forth in this Agreement. CardioGenesis will take
appropriate action by instruction to or written agreement with its employees who
are permitted access to Baasel Software or Updates to fulfill such obligations
of CardioGenesis. CardioGenesis will use its commercially reasonable efforts to
prevent any violation of Baasel's or Baasel's licensors' or suppliers' copyright
in Baasel Software or Updates. Except as such source code or other confidential
information may be used under the Manufacturing License in accordance with the
terms of Section 10(b) of this Agreement, CardioGenesis will not, and the terms
and conditions of sale or other transfer by CardioGenesis and of any third party
sellers permitted under this Agreement, will prohibit, reverse assembly,
decompiling or otherwise attempting to derive source code or other confidential
information from Baasel Software or Updates.
(c) Trademark License From CardioGenesis to Baasel. CardioGenesis
grants to Baasel a nonexclusive, royalty-free, worldwide license during the term
of this Agreement, revocable only for the failure of Baasel to perform its
obligations under this Agreement, to use CardioGenesis' trademarks, including
without limitation those trademark and names which CardioGenesis may choose to
claim as trademark as listed in Exhibit E attached hereto, to the extent
necessary for Baasel to perform Baasel's obligations under this Agreement.
Baasel may apply CardioGenesis' trademarks only to OEM Products and Parts,
instruction manuals for OEM Products and Parts, cartons for OEM Products and
Parts and other relevant documents and packaging sold by Baasel to CardioGenesis
under the terms of this Agreement or otherwise as authorized in writing by
CardioGenesis from time to time. CardioGenesis may, at CardioGenesis' election,
but only for the CardioGenesis Use, market the OEM Products and/or Parts, as
incorporated in CardioGenesis Products, or on a stand-alone basis, under
CardioGenesis' own name and trademarks.
(d) Noncompeting Use License by CardioGenesis to Baasel.
CardioGenesis hereby grants to Baasel a nonexclusive, royalty-free worldwide
license in perpetuity, revocable only for the failure of Baasel to perform its
obligations under this Agreement, to use solely such CardioGenesis Proprietary
Information, as defined in Section 2(b) hereof, as is necessary in order
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for Baasel to develop and manufacture and sell, for Baasel's own account or for
others, laser products for uses other than the CardioGenesis Use, provided that
no CardioGenesis Proprietary Information, whether included in the OEM Product
Improvements or not, will be disclosed to any third party without the prior
written consent of CardioGenesis or unless such third party is bound, prior to
such disclosure to such party, by a customary nondisclosure agreement in favor
of CardioGenesis, with respect to such CardioGenesis Proprietary Information,
the form of which nondisclosure agreement has been approved by CardioGenesis,
whose approval will not be unreasonably withheld. Baasel will not, and will not
grant to third parties any right to, reverse assemble, decompile or otherwise
attempt to derive source code or other Confidential Information from the
CardioGenesis Proprietary Information.
(e) No Other License Rights. Other than the specific license
rights granted herein by the parties to each other, neither party will have any
express or implied license or other rights to any confidential or proprietary
rights of the other. This Agreement grants neither party any rights to use the
other party's trademarks, trade names or service marks other than those rights
which are explicitly granted in this Agreement. Neither party will, nor will
attempt to, acquire the other's names, marks, logos, symbols, or the like, or
any that are confusingly similar thereto.
4. MANUFACTURE AND SUPPLY OF OEM PRODUCTS AND PARTS BY BAASEL.
(a) Manufacture and Supply of OEM Products by Baasel. Pursuant to
the terms hereof and following the completion of Phase 4 (or following the
completion of Phase 3 if the parties so agree in writing), Baasel will
manufacture and supply OEM Products to CardioGenesis, on an original equipment
manufacturer (OEM) basis. [ ** ]. In addition, if pursuant to Section 1(c)
hereof, CardioGenesis agrees in writing to any proposed engineering modification
to the OEM Product, CardioGenesis will have the opportunity, in its discretion,
to obtain an appropriate end-of-product-life purchase from Baasel of affected
OEM Products in unmodified form, for use in CardioGenesis Products, at the
purchase price in effect for such OEM Products immediately before such agreement
in writing by CardioGenesis. Baasel will not manufacture the OEM Product for,
nor will it sell the OEM Product to, any third party without the express prior
written consent of CardioGenesis.
(b) Supply Of Parts by Baasel. During the term hereof, and, if
CardioGenesis declines to use the Manufacturing License provided for in Section
10(b) hereof, then also for a [ ** ] period after Baasel discontinues the
manufacture of the OEM Products, Baasel will sell the replacement parts listed
in Exhibit F attached hereto (the "Parts") for OEM Products
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purchased by CardioGenesis, to CardioGenesis, or, at CardioGenesis' written
request to Baasel, to such customers of CardioGenesis as are specified in such
request. During any use by CardioGenesis of the Manufacturing License hereunder,
and at CardioGenesis' written request, Baasel will furnish vendor and part
number information for commercially available Parts and for all other spare
parts for OEM Products that have been purchased by CardioGenesis and by
CardioGenesis' customers.
(c) Notices. CardioGenesis will have the right, subject to the
remainder of this Section 4(c), to remove Baasel's trademarks, trade names, and
other Baasel identification appearing on such OEM Products, and all Baasel
warranty cards and other Baasel documentation accompanying same before resale of
such OEM Product, provided that (i) CardioGenesis will consult with Baasel in
good faith as to any such removal, and (ii) CardioGenesis will only effect such
removal to the extent permitted by law, and (iii) commercially reasonable and/or
legally required proprietary notices incorporated in, marked on, or affixed to
the OEM Products and Parts by Baasel will not be removed or obliterated by
CardioGenesis without Baasel's prior written consent, and (iv) CardioGenesis
will affix such other commercially reasonable proprietary notices to the OEM
Products and Parts on Baasel's behalf, at CardioGenesis' expense, as Baasel
reasonably requests.
(d) Discontinued or Obsolete OEM Products. If Baasel intends to
discontinue the manufacture or sale of, or otherwise render or treat as
obsolete, the OEM Product, Baasel will give at least one (1) year's prior
written notice thereof to CardioGenesis (a "Baasel Discontinue/Obsolete
Notice").
(e) Manufacturing Standards For OEM Products and Parts.
(i) OEM Products and Parts For Sale and/or Distribution
Outside the United States. All OEM Products and Parts ordered by CardioGenesis
hereunder for sale and/or distribution outside the United States will be
manufactured and assembled by Baasel, in accordance with applicable regulations
and standards for such manufacturing. OEM Products and Parts manufactured
outside of the United States may, subject to specific written agreement by the
parties, be drop-shipped to CardioGenesis' customer by Baasel at CardioGenesis'
expenses and will be subject to quality assurance procedures established in
writing by CardioGenesis on the basis of applicable standards (ISO 9000 and
MDDE) which written procedures have been delivered to and approved by Baasel,
whose approval will not be unreasonably withheld or delayed.
(ii) OEM Products and Parts For Sale and/or Distribution
Within the United States. All OEM Products and Parts ordered by CardioGenesis
hereunder for sale and/or distribution in the United States will be manufactured
by Baasel or by such subcontractor(s) as may be approved by Baasel and
CardioGenesis in writing in advance (which approval will not unreasonably be
withheld or delayed), to such level of, and under such conditions of,
manufacturing as Baasel and CardioGenesis will agree in writing, [ ** ].
CardioGenesis will, at its own expense, either itself, through a
regulatory-qualified subcontract manufacturer acceptable to Baasel, whose
acceptance will not be
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unreasonably withheld or delayed, complete the manufacture of such OEM Product
and/or Part as is required, under applicable U.S. government standards,
including applicable regulations of the FDA and of all other applicable U.S.
agencies, governing manufacturing thereof for such sale within the United
States.
(f) Regulatory Approval. Each of CardioGenesis and Baasel will be
responsible at its own expense for obtaining and maintaining during the term of
this Agreement, and after the term of this Agreement to the extent required by
law as to OEM Products and Parts manufactured or sold as provided in this
Agreement, all regulatory approvals required, whether U.S. or international, in
order for the obtaining party to use and/or sell or otherwise distribute, in the
case of CardioGenesis, the OEM Product and Parts, and in the case of Baasel, any
products referred to in Section 3(d) hereof, including without limitation CE
mark approval. Each party will render to the other party such commercially
reasonable assistance and cooperation, at the expense of the rendering party, as
the requesting party reasonably and in good faith, requests in connection with
the obtaining and maintenance of such approvals. The parties will as promptly as
possible inform each other in writing with respect to, and will furnish the
other with a copy of, all such approvals related to OEM Products and Parts, or
by Baasel as to products referred to in Section 3(d) hereof, obtained by the
notifying party during the term of this Agreement. CardioGenesis will, to the
extent lawfully permitted, promptly supply to Baasel all CardioGenesis clinical
trials data and other relevant similar information of CardioGenesis requested by
Baasel in writing in good faith in connection with Baasel's performance of
Baasel's obligations hereunder with respect to regulatory compliance including
obtaining and maintaining CE Mark approval. Baasel assumes no responsibility for
any clinical trials of CardioGenesis, nor for the validity, acceptance and
conformity of any clinical trials data to be provided by CardioGenesis to Baasel
or to any third party for purposes of any regulatory approval, or for the effect
upon obtaining and maintaining any such approval, including CE Mark approval,
caused by any delay in obtaining or furnishing, or by the content of, any such
clinical trials data.
5. ORDER AND ACCEPTANCE.
(a) General.
(i) Form of Purchase Orders. All orders for OEM Products
and Parts submitted by CardioGenesis during the term hereof will be subject to
the terms and conditions of this Agreement, except as otherwise agreed to in a
writing signed by both parties, and will be initiated by written purchase
orders, on CardioGenesis' then-standard form of purchase order, sent by
CardioGenesis to Baasel. Orders may initially be placed by CardioGenesis by
facsimile provided that CardioGenesis will deliver a confirming written copy of
such purchase order to Baasel within ten (10) days after such facsimile order is
sent by CardioGenesis. In the event of a conflict between the terms of any
CardioGenesis purchase order or Baasel acknowledgment and the terms of this
Agreement, the terms of this Agreement will control.
(ii) Acceptance or Rejection of Orders By Baasel. No
purchase order placed by CardioGenesis will be binding upon Baasel until
accepted by Baasel in writing, which may be by facsimile with original to follow
by air mail to CardioGenesis, and Baasel will have no liability to CardioGenesis
with respect to purchase orders, or portions thereof, that are not so
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accepted. Baasel will notify CardioGenesis promptly of the acceptance or
rejection by Baasel of a CardioGenesis purchase order, or portion thereof, and
of the agreed assigned delivery date for accepted orders. Baasel will be deemed
to have accepted a CardioGenesis purchase order, or any portion thereof, to
which Baasel has not objected to CardioGenesis in writing (i) no later than
fifteen (15) business days (a "business day" being defined for purposes of this
Agreement as a day when Baasel's headquarters offices in Germany are open for
business at the normal level of Baasel's operations) after the date of such
CardioGenesis purchase order, if sent first by CardioGenesis by facsimile or
(ii) no later than twenty (20) business days after the date of such
CardioGenesis purchase order, if such purchase order is first sent by
CardioGenesis by airmail or courier.
(iii) Partial Shipments; Delivery Dates. Partial shipments
will be allowed only to the extent agreed in writing by CardioGenesis before
such partial shipment is shipped. Baasel will use its best efforts to deliver
OEM Products and Parts at the times specified in its written acceptance of
CardioGenesis' purchase orders. CardioGenesis will inform Baasel at the
beginning of each calendar quarter in writing of the detailed delivery dates of
all OEM Products under that portion of Rolling Purchase Orders (as hereinafter
defined) that have become binding, as further provided in this Section 5, and
that are, according to CardioGenesis' records, to be shipped by Baasel in the
consecutive calendar quarter.
(iv) Orders of Less Than [ ** ] Units. CardioGenesis will
use its commercially reasonable efforts, but will not be obligated, to (A) order
at least [ ** ] units of OEM Product as to any Rolling Purchase Order (as
hereinafter defined) as initially placed by CardioGenesis, and (B) not reduce
below [ ** ] the total number of OEM Products in any Rolling Purchase Order
after it is initially placed. CardioGenesis will give Baasel as much notice in
writing in advance as is commercially reasonable with respect to any Rolling
Purchase Order which CardioGenesis anticipates placing of less than [ ** ]
units, and as to any such anticipated reduction.
(b) Initial Order. CardioGenesis has, on the Effective Date,
placed a written binding purchase order with Baasel (the "Initial Order") for
[ ** ] units of commercial production-level OEM Products for delivery in 1997,
which order is accepted by Baasel's countersignature hereof. Such ordered units
are apart from, and additional to, the total of [ ** ] functional, prototype and
pilot units, together, ordered by CardioGenesis under Section 1(h) hereof.
Payment for the OEM Products ordered by the Initial Order will be made as
specified in Section 6(f) hereof.
(c) Rolling Purchase Orders.
(i) General. CardioGenesis will deliver to Baasel a
written purchase order on CardioGenesis' standard form of purchase order (the
"Rolling Purchase Order") [ ** ], for OEM Products and, as applicable, Parts.
Each such Rolling Purchase Order (i) will be for the [ ** ] period commencing
[** ] after the date on which the order is delivered to Baasel, and (ii) will
be a [ ** ]
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[ ** ], and (iii) will set forth the desired delivery dates, subject to the
provisions of Section 5(c)(viii) hereof with respect to rescheduling, by
calendar date, or grouped by calendar week, for those units of OEM Product for
which delivery is requested by CardioGenesis during such [ ** ] period. One such
Rolling Purchase Order for such [ ** ] will be delivered to Baasel no later than
[ ** ] of such year, beginning with [ ** ], and the other such Rolling Purchase
Order for such [ ** ] will be delivered to Baasel no later than [ ** ] of such
year, beginning with [ ** ].
(ii) Rolling Purchase Order For Deliveries During The
Period From [ ** ] Through [ ** ]. No later than [ ** ], CardioGenesis will
deliver to Baasel a Rolling Purchase Order for OEM Products, and Parts as
applicable, with delivery dates requested during the period from and including
[ ** ] through and including [ ** ] (the "[ ** ] Purchase Order"). [ ** ]
(iii) Rolling Purchase Order For Deliveries During The
Period From [ ** ] Through [ ** ]. No later than [ ** ], CardioGenesis will
deliver to Baasel a Rolling Purchase Order for OEM Products, and Parts as
applicable, with delivery dates requested during the period from and including
[ ** ] through and including [ ** ] (the "[ ** ] Purchase Order"). [ ** ]
(iv) Rolling Purchase Order For Deliveries During The
Period From [ ** ] Through [ ** ]. No later than [ ** ], CardioGenesis will
deliver to Baasel a Rolling Purchase Order for OEM Products, and Parts as
applicable, with delivery dates requested during the period from and including
[ ** ] through and including [ ** ] (the "[ ** ] Purchase Order"). [ ** ]
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[ ** ]
(v) Rolling Purchase Order For Deliveries During Periods
After [ ** ]. If the parties have agreed on unit pricing for OEM Products to be
sold by Baasel to CardioGenesis hereunder for delivery after [ ** ], and after
[ ** ] of the relevant then-current year thereafter, or if such pricing has been
set by application of Section 6(c)(iv) hereof, then thereafter, on a rolling
calendar year basis, CardioGenesis will place Rolling Purchase Orders for OEM
Products and/or Parts, in the manner provided herein, which [ ** ].
(vi) Increase in Number of Units Ordered. Additional
quantities up to and including [ ** ] of the quantity of OEM Products and/or
Parts originally set forth in any Rolling Purchase Order may be ordered by
CardioGenesis no later than [ ** ] prior to the relevant scheduled shipment
dates for such original quantity; additional quantities greater than [ ** ] and
through [ ** ] of the previous order quantities may be ordered by CardioGenesis
no later than [ ** ] prior to the relevant scheduled shipment dates; and
additional quantities greater than [ ** ] of such previous order (i.e., more
than [ ** ]) may be ordered by CardioGenesis no later than [ ** ] prior to the
relevant scheduled shipment dates.
(vii) Delay of Shipments Upon CardioGenesis' Request.
CardioGenesis may by written notice to Baasel delivered at least [ ** ] prior to
Baasel's scheduled shipment date therefor, delay the shipment of not more than
[ ** ] of the portion of any Rolling Purchase Order which has [ ** ] by the
application of Section 5(c)(i) hereof, by up to [ ** ] after the originally
scheduled delivery. Any further delay of delivery beyond such [ ** ] period that
may be requested by CardioGenesis will be in writing and will be deemed as
shipment of such delayed portion by Baasel to CardioGenesis, and CardioGenesis
will, in addition to paying the relevant purchase price for the OEM Products
and/or Parts, if so requested by Baasel in writing pay to Baasel, or for the
account of Baasel, commercially reasonable storage and handling fees for the
portion so delayed until shipped on the delayed date requested by CardioGenesis.
6. PRICING AND PAYMENT.
(a) General Pricing Conditions. All pricing of OEM Products and
Parts from Baasel to CardioGenesis will be commercially reasonable prices. Upon
the purchase by CardioGenesis of OEM Products and/or Parts from Baasel during
the term hereof while CardioGenesis is not using the Manufacturing License as
provided in Section 10(b) hereof, CardioGenesis may sell or otherwise
distribute, on a worldwide, exclusive basis, OEM Products and/or Parts either as
incorporated into CardioGenesis Products, or on a stand-alone basis to third
parties, for no fee or royalty or other amount additional to the purchase price
therefor charged by Baasel to CardioGenesis pursuant to this Agreement.
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(b) Exchange Rate; Exchange Range. All OEM Product and Parts
pricing will be in United States dollars unless the parties otherwise agree in
writing. Prices for deliveries scheduled during the [ ** ] of a given Rolling
Purchase Order will be based on an exchange rate of United States dollars ($) to
German deutschemarks (DM) (the "Exchange Rate"), determined as provided in this
Section 6(b), at the date upon which Baasel receives the Rolling Purchase Order
to which such [ ** ] relates. The initial Exchange Rate will be [ ** ]. At the
time each Rolling Purchase Order is placed, commencing with the [ ** ]Purchase
Order to be placed by CardioGenesis by [ ** ], the following will apply to
prices for the [ ** ] of such Rolling Purchase Order:
(i) [ ** ]
(ii) [ ** ]
(iii) [ ** ]
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[ ** ]
Baasel will promptly notify CardioGenesis in writing, by facsimile, of
any such change in the Exchange Rate and the Exchange Range, setting forth in
such notice the new Exchange Rate and new Exchange Range and the effective date
thereof, and referring in reasonable detail to the binding portion of the
relevant Rolling Purchase Order to which such new Exchange Rate and new Exchange
Range will apply.
(c) OEM Product Prices From Baasel to CardioGenesis.
(i) General. Baasel's prices to CardioGenesis for OEM
Products will be Ex `Works as set forth in Exhibit C hereto, as such Exhibit C
may be amended after the Effective Date by mutual execution of the parties of an
updated version thereof. OEM Product prices as set forth on Exhibit C do not
include the costs or charges of any installation, service, repair or training
for OEM Products.
(ii) Two-Tier Pricing. The parties intend, as is reflected
in the prices set forth in Exhibit C, that the pricing to CardioGenesis for OEM
Products sold by Baasel to CardioGenesis pursuant to this Agreement will be
based upon a two-tier structure contemplating completion of (A) a
commercially-salable top-level OEM Product (the "Full-Feature Product") expected
to be in production in September, 1997, and having the specifications set forth
in Exhibit A hereto, and the initial pricing as set forth in Exhibit C hereto,
and (B) a commercially-salable cost-reduced OEM Product (the "Cost-Reduced
Product"), expected to be in production in January, 1998, with specifications to
be agreed in writing by CardioGenesis and Baasel prior to January 31, 1998,
which agreed specifications will be attached as an amendment to Exhibit A
hereto.
(iii) Quantity Discounts; Calculation of Unit Prices. The
prices for OEM Products sold by Baasel to CardioGenesis hereunder will be based
upon a decreasing price for greater numbers of units ordered in a given Rolling
Purchase Order, with certain agreed pricing level division points, as is
reflected in Exhibit C as attached hereto at the Effective Date. In determining
the relevant price for units of OEM Product based upon the quantity ordered in a
given Rolling Purchase Order, the calculation will be made separately in the
Rolling Purchase Order for Full-Feature Products and Cost-Reduced Products
according to the respective number of each type of unit in the relevant Rolling
Purchase Order.
(iv) Pricing of Cost-Reduced Product. Baasel will use its
commercially diligent efforts to achieve a price to CardioGenesis for the
Cost-Reduced Product of [ ** ] or less, and such figure is reflected in Exhibit
C hereto as the price by Baasel to CardioGenesis for over [ ** ] units of
Cost-Reduced Product scheduled for delivery in 1998. [ ** ]
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[ ** ] The parties also will discuss in good faith, and will use their
commercially reasonable efforts to agree upon in writing, as an amended Exhibit
C, the prices from Baasel to CardioGenesis for quantities of Cost-Reduced
Product of [ ** ] units, [ ** ] through [ ** ] units, and [ ** ] through [ ** ],
provided that Baasel will be under no obligation to accept orders from
CardioGenesis for less than [ ** ] units of Cost-Reduced Product until pricing
for quantities less than [ ** ] units has been so agreed by the parties in
writing.
(iii) OEM Product Prices For Deliveries Scheduled in 1997
and 1998. The OEM Product unit prices from Baasel to CardioGenesis for
deliveries under the binding portion of a Rolling Purchase Order for delivery in
1997 and 1998 are set forth in Exhibit C hereto as attached at the Effective
Date, subject to possible adjustment as further provided in this Agreement.
(iv) Pricing For Calendar Years 1999 And Beyond. Prices
for OEM Products scheduled for delivery after December 31, 1998 will reflect the
quantity discount concept, according to the number of units ordered, and using
the quantity levels, reflected in the OEM Product prices for deliveries in 1997
and 1998 as set forth in Exhibit C hereof as attached on the Effective Date. If
the parties have not agreed in writing, as an amendment hereto, prior to June 30
of the then current calendar year (commencing with June 30, 1998 as to calendar
1999), as to prices from Baasel to CardioGenesis for OEM Products for deliveries
scheduled in the next calendar year under the binding portion of the Rolling
Purchase Order for such next calendar year, then the pricing from Baasel to
CardioGenesis for OEM Products for deliveries scheduled in such next calendar
year will be the pricing for OEM Products for deliveries scheduled in the
then-current calendar year with such adjustment thereto as results from the
application to such relevant current-year prices of the applicable factor
provided by the German federal statistical authorities and known in German as
the "Preisgleitklausel," rounded downward to the nearest whole dollar.
(d) Parts Pricing. Baasel will sell Parts to CardioGenesis on a
most-favored customer basis, regardless of quantity ordered by CardioGenesis,
for Parts which are not unique to the OEM Product, and will charge CardioGenesis
a price for any such unique Parts as bear a commercially reasonable proportional
relation to such most-favored customer price for the non-unique Part nearest in
form and functionality to such unique Part. The initial prices for Parts have
not been determined by the parties as of the Effective Date, but will be agreed
upon by the parties in good faith as soon as possible after the Effective Date,
and no later than by the completion by Baasel of Phase 4 under the Development
Efforts, with such agreement to be evidence by an amended executed Exhibit F
hereto.
(e) Taxes; Certain Price Adjustments.
(i) Taxes. The purchase price from Baasel for OEM Products
and Parts does not include any taxes or duties that may be applicable to the OEM
Products. When Baasel has the legal obligation to collect such taxes, the
appropriate amount will be added to and clearly identified in Baasel's invoice
to CardioGenesis and will be paid by CardioGenesis unless
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CardioGenesis provides Baasel with a valid tax exemption certificate authorized
by the appropriate taxing authority.
(ii) Certain Price Adjustments. During the term of this
Agreement the parties may determine to effect certain adjustments to the prices
charged by Baasel to CardioGenesis for OEM Products and/or Parts as follows, as
well as any other price adjustments which the parties may, but are not required
to, mutually agree in writing:
(A) Certain Royalties. The parties will discuss in
good faith, and evidence in writing any agreement by them as to, the inclusion,
within the price to be charged by Baasel to CardioGenesis hereunder for OEM
Products and Parts, of any royalties which Baasel may be required to pay to
third parties after the Effective Date, relating to the license to or other
acquisition by Baasel after the Effective Date of intellectual property rights
which are determined by CardioGenesis and Baasel to be essential or expedient
for the then-current or future OEM Products, and/or Parts within the
CardioGenesis Use, but not including any royalties required to be paid to any
third party by Baasel by judicial order or binding settlement agreement arising
from any allegation by such third party of infringement by Baasel of such third
party's proprietary rights. There will be added to the prices otherwise shown on
Exhibit C hereto, and CardioGenesis will pay to Baasel as part of the purchase
price for, each OEM Product unit that is scheduled for delivery into, or which
is otherwise intended for sale or other distribution within, the United States,
a commercially reasonable amount, prorated per unit, to account for any
royalties which Baasel, or Baasel's United States subsidiary, in Baasel's good
faith and after consultation with its legal counsel, actually is paying or in
good faith believes it will be required to pay, under so-called Patlex patent
arrangements with respect to a certain third-party general laser patent, with
respect to such OEM Product unit.
(B) Regulatory Changes. If during the term hereof,
regulatory requirements are changed so as to impose an increased burden on a
manufacturer of OEM Products and/or Parts than the burden previously existing,
Baasel and CardioGenesis will, on a timely basis, negotiate and agree in good
faith, and will execute and deliver such written documents as the other party
requests in good faith, with respect to any appropriate adjustments in the price
charged to CardioGenesis by Baasel for OEM Products and Parts, which the
relevant party, in its good faith judgment after consultation with the other
party, believes would be appropriate in view of such greater burden, in order to
meet regulatory requirements, than the requesting party was required to bear
prior thereto. In such determination there will be taken into account any such
increased burden upon CardioGenesis as to any final manufacturing it may perform
for OEM Products and Parts to be sold within the United States.
(C) Costs of Certain Baasel Insurance Premiums.
There is not included in the prices for OEM Products and Parts set forth herein
the amount of any insurance premium that Baasel may be required to pay in order
to maintain product liability insurance covering Baasel in an amount
appropriate, in Baasel's good faith judgment, after appropriate consultation
with its legal counsel and products liability insurance advisors, to insure
against any products liability of Baasel that may arise from the sale and
distribution by CardioGenesis of OEM Products and/or Parts within the United
States. The parties will discuss and agree in writing upon any adjustment to
prices charged by Baasel to CardioGenesis for OEM Products
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<PAGE> 20
and/or Parts that may be requested by Baasel in good faith if Baasel so
determines to obtain and maintain such insurance coverage.
(D) Orders Of Less Than [ ** ] Units Of OEM
Product. If the [ ** ] of any Rolling Purchase Order placed by CardioGenesis is
for less than [ ** ] units of OEM Product (as distinguished from any reduction
to [ ** ] or less units of any binding order previously placed), and if in
Baasel's good faith judgment, after consultation with CardioGenesis, [ ** ],
then Baasel may, by giving written notice to CardioGenesis given at least ten
(10) days before the shipment by Baasel of any unit of OEM Product in such
order, [ ** ].
(iii) Effect of Increases or Decreases in Rolling
Purchase Orders.
(A) Effect of Increases Requested By CardioGenesis
To Previously-Delivered Rolling Purchase Orders For Delivery in 1998. If, in the
binding Rolling Purchase Order for deliveries in the period [ ** ] through
[ ** ], CardioGenesis increases the number of units of OEM Product therein, not
later than [ ** ] before the relevant scheduled delivery date for such order,
by not more than [ ** ] of the number of units of OEM Product that were
represented in the such portion of such Rolling Purchase Order [ ** ].
(B) [ ** ]
(C) Effect of Decreases In Number Of Units of OEM
Products Ordered. If CardioGenesis decreases the number of units of OEM Product
in any nonbinding portion of a Rolling Purchase Order in making it a binding
Rolling Purchase Order, no
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downward adjustment to prices previously determined for such order will be made,
but CardioGenesis will pay to Baasel, or to such third parties as Baasel directs
CardioGenesis in writing, the amount of all cancellation charges, including
penalties and liquidated damages, paid or payable by Baasel to such third
parties as a result of material or inventory cancellation due to such reduction.
Baasel will use its commercially reasonable efforts to minimize the amount of
such cancellation charges.
(f) Payment. Except as the parties may otherwise specifically
agree in writing, and except as to the Initial Order, CardioGenesis will pay
Baasel for units of OEM Products and/or Parts ordered by CardioGenesis hereunder
under the binding portion of the relevant Rolling Purchase Order, on September
30, and December 31, and March 31, and June 30, of each year, in an amount equal
to fifty percent (50%) of the aggregate purchase price for the total number of
units of OEM Products and/or Parts scheduled under such binding portion to be
delivered during the calendar quarter commencing immediately after three (3)
months after such payment date. The balance of payment for each binding Rolling
Purchase Order will be paid, as to portions of such order shipped, within
forty-five (45) days after the date of shipment by Baasel of each such portion
of such order according to the delivery dates of such relevant order. Baasel
will invoice CardioGenesis with each shipment for such balance of the order
payment. Set forth below is the agreed payment schedule for the first 50% of the
binding portion of the relevant Rolling Purchase Order for delivery within the
time periods shown; such model, with appropriate calendar year changes, will
apply to the binding portion of Rolling Purchase Orders scheduled for delivery
after December 31, 1998.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Payment Due Date
(No Later Than) Amount of Payment
- --------------------------------------------------------------------------------
<S> <C>
[ ** ]
[ ** ] of the aggregate purchase price for the total number of
units of OEM Product in the Initial Order.
- --------------------------------------------------------------------------------
[ ** ] [ ** ] of the aggregate purchase price for the total number of
units of OEM Product in such [ ** ] scheduled to be delivered
from and including [ ** ] through and including [ ** ].
- --------------------------------------------------------------------------------
[ ** ] [ ** ] of the aggregate purchase price for the total number of
units of OEM Product in such [ ** ] scheduled to be delivered
from and including [ ** ] through and including [ ** ].
- --------------------------------------------------------------------------------
[ ** ] [ ** ] of the aggregate purchase price for the total number of
units of OEM Product in such [ ** ] scheduled to be delivered
from and including [ ** ] through and including [ ** ].
- --------------------------------------------------------------------------------
[ ** ] [ ** ] of the aggregate purchase price for the total number of
units of OEM Product in such [ ** ] scheduled to be delivered
from and including [ ** ] through and including [ ** ].
- --------------------------------------------------------------------------------
</TABLE>
(g) Service Charges; Cost and Expenses; Refusal to Deliver. Any
invoiced amount not received by Baasel within twenty (20) days after its due
date thereafter will be subject, until paid, to a service charge of the lesser
of one and one-half percent (1.5%) per month or the maximum permissible rate
under applicable law. CardioGenesis will pay all of Baasel's reasonable costs
and expenses, including reasonable fees and costs of attorneys, to the extent
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permitted by law, to enforce and preserve Baasel's rights under this Section
6(g). Baasel may refuse to deliver OEM Products and/or Parts to CardioGenesis if
and to the extent that CardioGenesis fails to make timely payment as required
hereunder.
7. DELIVERY; INSTALLATION, INSPECTION AND ACCEPTANCE; TRAINING.
(a) Preferential Allocation. CardioGenesis will receive
preferential allocation, among Baasel's customers, of all OEM Products and Parts
necessary to meet the relevant delivery dates and quantities set forth in the
binding portion of the relevant Rolling Purchase Order.
(b) Shipping. All OEM Products and Parts delivered by Baasel
pursuant to the terms of this Agreement will be:
(i) Acceptance Criteria. Only units of OEM Product and
Parts which have passed the Acceptance Criteria (as defined in Section 7(c)
hereof.
(ii) Packaging. Suitably packed for air freight shipment,
or other appropriate common carrier as may be communicated by CardioGenesis in
writing to Baasel reasonably in advance of Baasel's planned shipment date, in
Baasel's standard shipping cartons for such items, which in each case will meet
all packaging validation requirements worldwide for shipment of OEM Products and
Parts as communicated by CardioGenesis to Baasel in writing reasonably in
advance of Baasel's planed shipment date; and
(iii) Marking. Marked for shipment to CardioGenesis'
address set forth on the signature page hereof, or to the end of the address of
such customer of CardioGenesis as CardioGenesis and Baasel agree in writing; and
(iv) Delivery. Delivered to CardioGenesis, or to
CardioGenesis' customer, or CardioGenesis' carrier agent Ex Works Baasel's main
manufacturing plant. Unless otherwise instructed in writing by CardioGenesis,
Baasel will select the carrier.
All freight, insurance, and other shipping expenses, as
well as any special (non-Baasel standard) packing expense, will be paid by
CardioGenesis.
(c) Installation, Inspection and Acceptance. OEM Products and
Parts will be delivered to CardioGenesis or to the relevant CardioGenesis
customer (if drop-shipped by Baasel to such customer at CardioGenesis' written
request), as the case may be, and installed and made operational, pursuant to,
and along with a written copy of, commercially reasonable receiving and
inspection protocols and acceptance criteria (collectively, the "Acceptance
Criteria"), including ISO 9000 and MDDE, and installation procedures, as will be
agreed upon in writing by CardioGenesis and Baasel no later than (10) days
before CardioGenesis' first Rolling Purchase Order is placed after the Initial
Order. The Acceptance Criteria will be attached to this Agreement, upon such
written agreement by the parties, as Exhibit G. Such written Acceptance Criteria
will (i) provide that inspection and acceptance testing will be performed by an
individual or individuals who have received what CardioGenesis and Baasel will
agree, and which they will set forth in such inspection protocols and acceptance
criteria, is proper training with respect
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<PAGE> 23
thereto, and (ii) which of CardioGenesis, Baasel and/or third party personnel
will perform such installation, and (iii) how the costs of such installation,
and of any inspection not performed by the customer, are to be billed and paid.
The Acceptance Criteria will set forth the time period after CardioGenesis', or
its customer's, receipt of the relevant OEM Product and Parts within which
inspection must be made. The installation procedures will require Baasel, at its
expense, to provide such commercially reasonable level of technical assistance
by providing instruction manuals and other customary similar documents free of
charge, and providing telephone and facsimile assistance, (but not involving
travel of any Baasel personnel or any other costs of such assistance except as
Baasel may specifically agree in writing), to CardioGenesis and/or such
third-party installation personnel as may be provided in the installation
procedures, to afford the best opportunity for a successful and timely
installation. The installation procedures and inspection criteria will contain
Baasel's standard inspection testing procedures for such OEM Product, with such
modifications thereto as CardioGenesis reasonably and in good faith requests of
Baasel in writing and which lawfully may be made. Any OEM Product or Part not
lawfully rejected by CardioGenesis or such customer, as the case may be, within
the relevant period provided by such inspection protocols and acceptance
criteria, after compliance with the relevant installation procedures and with
such inspection protocols and acceptance criteria, will be deemed to have been
accepted by CardioGenesis or such customer, as the case may be.
(d) Training. Baasel will provide, at Baasel's premises, to a
limited, commercially reasonable number of CardioGenesis' personnel (up to two
persons per session) at reasonable periodic intervals: (i) training as to proper
installation, service and repair of the OEM Products and Parts, and, at the
specific written request of CardioGenesis as to those CardioGenesis employees
whom CardioGenesis believes in good faith have a need to know, full access to
the OEM Product and Parts manufacturing process of Baasel. The frequency, format
and content of the training will be determined by Baasel in consultation with
CardioGenesis. Such training with respect to the manufacturing process will be
designed to enable CardioGenesis to be able, upon any proper exercise of the
Manufacturing License, reasonably to use and to instruct its subcontractor
manufacturers to use, the Manufacturing License should it become necessary to do
so under the terms of this Agreement. CardioGenesis will pay its own costs of
its personnel for travel, food, and lodging during such training. CardioGenesis
also will pay to Baasel, upon the written request of Baasel, setting forth the
calculation of the following amounts in reasonable detail, (1) Baasel's
customary training fees for such training, and (2) the reasonable actual costs,
without profit, of Baasel in preparing manuals and other training materials for
the training to such CardioGenesis personnel . Each such CardioGenesis
individual will execute such customary mutual nondisclosure agreement with
Baasel with respect to such training as Baasel may reasonably request, provided
that no such nondisclosure agreement will diminish or limit the rights of
CardioGenesis to fully use the Manufacturing License should it become necessary
to do so under the terms of this Agreement.
8. WARRANTY. Baasel will extend to CardioGenesis a standard medical
laser products warranty on the OEM Products and Parts, which warranty is as set
forth in Exhibit H attached hereto and incorporated herein by reference.
Baasel's warranty will always be of at least one (1) year on labor and parts, in
each case after the date shipped by Baasel (or, as to Parts supplied to Baasel
by third parties, such longer period as such third party provides for warranty
for the relevant Part). Such warranty will provide, at a minimum, that Baasel
will, at the expense
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<PAGE> 24
of Baasel, including inbound and outbound shipping costs but excluding duties
and import or export clearance fees or taxes, repair or replace OEM Products and
Parts found defective upon receipt by CardioGenesis or found defective by the
end-user during the relevant warranty period.
9. TERM AND TERMINATION.
(a) Term. The initial term of this Agreement will be for the
period commencing on the date hereof, and, unless sooner terminated as provided
in this Agreement, continuing through and including December 31, 2000, and the
term hereof will be automatically renewed thereafter for successive one year
terms commencing on January 1, 2001, and on January 1 of each successive
calendar year unless either CardioGenesis or Baasel gives the other written
notice of termination at least one hundred and eighty (180) days before the end
of the then-current one year term (i.e., no later than July 1 in the year of the
then-current term), or unless otherwise sooner terminated as provided in this
Agreement.
(b) [ ** ]
(i) [ ** ]
(ii) [ ** ]
(iii) [ ** ]
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<PAGE> 25
[ ** ]
(iv) [ ** ]
(v) [ ** ].
(c) Other Rights to Terminate; Timing of Termination. Either
party hereto may terminate this Agreement by written notice to the other as
provided in (i) Section 1(b)(i) hereof if CardioGenesis elects not to continue
its Development Program, or (ii) Section 1(b)(ii) hereof for failure to agree on
adjustments to OEM Product research and development payments, or (iii) Section
1(b)(iv) for failure for the parties to agree upon increased payment for the
Development Efforts under certain circumstances or (iv) Section 10(a)(v) hereof
due to failure to enter into the Escrow Agreement, or (v) if the other party
materially breaches this Agreement (other than a Baasel breach which is a
Triggering Event and other than breaches for which other time periods for cure
are specifically provided herein) and such breach remains uncured for ninety
(90) days following written notice of such breach, setting forth in reasonable
detail the nature of the breach, given to the breaching party by the
nonbreaching party. Baasel may terminate this Agreement by written notice to
CardioGenesis if proceedings are commenced by or against CardioGenesis for
bankruptcy, insolvency or debtor's relief or if CardioGenesis is liquidated or
dissolved, or pursuant to the terms of Section 10(a)(vii) of this Agreement. Any
termination hereunder for which a specific notice or other period is not
required under this Agreement may be made immediately, upon the delivery of the
notice to the receiving party, or at such other future time after the date of
notice of termination as the party giving such notice specifies therein.
(d) Fulfillment of Orders Upon Termination or Expiration. Any
termination of this Agreement for any reason including CardioGenesis' breach, or
expiration of the term hereof, will not prevent Baasel from fulfilling, if it so
elects, all orders from CardioGenesis accepted by Baasel prior to the date of
termination and purchase orders placed by CardioGenesis with Baasel within six
(6) months after the date of such termination, in each case at the delivery
times provided in such accepted orders or as otherwise agreed in writing by
CardioGenesis and Baasel; provided, however, that if termination is as a result
of breach by CardioGenesis of its obligation to pay undisputed amounts due
hereunder to Baasel, Baasel may demand from CardioGenesis commercially
reasonable assurance of payment, such as prepayment or letters of
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<PAGE> 26
credit, prior to shipment of OEM Products and/or Parts by Baasel, to ensure
payment for such post-termination fulfillment of orders.
(e) Transition Assistance. In the event of any termination of
this Agreement for any reason, including any breach by Baasel or by
CardioGenesis other than an uncured accidental or willful breach by
CardioGenesis, and if CardioGenesis is not, by virtue of the application of the
terms of this Agreement, able to use the Manufacturing License from and after
such termination, then Baasel will render such commercially reasonable
assistance, at CardioGenesis' sole expense, as CardioGenesis may in good faith
request of Baasel, with commercially reasonable advance notice in writing to
Baasel, in order to assist CardioGenesis in identifying a qualified manufacturer
of a laser for CardioGenesis Products as a substitution for the OEM Product, and
in transitioning to manufacture of such substitute laser product as soon as
possible. Baasel may require that CardioGenesis and/or third parties execute and
deliver such customary nondisclosure agreements as Baasel may believe in good
faith are appropriate or necessary for the protection of Baasel Confidential
Information or Baasel Proprietary Information in the providing of such
assistance by Baasel.
10. MANUFACTURING ESCROW: MANUFACTURING LICENSE.
(a) Manufacturing Escrow.
(i) Escrow Agent; Escrow Agreement; Escrowed Materials. No
later than June 30, 1997, CardioGenesis and Baasel will identify and enter into
a written agreement (the "Escrow Agreement") with an independent escrow agent
chosen by mutual agreement of Baasel and CardioGenesis (the "Escrow Agent") to
establish a Manufacturing Escrow (the "Manufacturing Escrow"), to be located at
a location in Germany to be set forth in such Escrow Agreement, of the Escrowed
Materials, as hereinafter defined. For purposes of this Agreement, the "Escrowed
Materials" means at least one full and accurate copy, in English if such copy
already exists, of all information commercially reasonably necessary in order
for CardioGenesis to manufacture, or to have manufactured for CardioGenesis by
third party manufacturer subcontractors, the OEM Products and Parts, in the
event the Manufacturing License described in Section 10(b) hereof becomes
effective as provided herein, and includes, without limitation, all drawings,
schematics, manuals, software (including Baasel Software and Updates) in source
code (as to third-party software licensed to Baasel, only to the extent such
license allows such deposit of source code) and object code format, and all
standard operating policies and procedures ("SOP's") of Baasel, including,
without limitation, component, material and device specifications, manufacturing
processes, test methods and procedures, validation systems, methods and tests
material, and all SOP's of vendors to Baasel of materials or components for the
OEM Products or Parts, and a copy of Baasel's device manufacturing license from
the relevant licensing authority or authorities, a copy of Baasel's registration
with the FDA (if and when obtained) and with other relevant regulatory bodies or
agencies, and of other related registration files of Baasel, including all
inspection reports and warning letters, and a copy of all other correspondence
to or from Baasel with all other regulatory bodies relevant to the OEM Products
and/or any Part, and including in each case such documents as they relate to the
Development Efforts.
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<PAGE> 27
(ii) Delivery of Escrowed Materials By Baasel;
Notification to CardioGenesis; Inspection By CardioGenesis. The Escrow Agreement
will provide that within forty-five (45) days after the date of shipment by
Baasel to CardioGenesis of the last pilot unit as provided in Section 1(h)(iii)
hereof, Baasel will provide to the Escrow Agent, and the Escrow Agent will hold
in the Manufacturing Escrow in confidence, as hereinafter provided, the Escrowed
Materials as they exist through the date of shipment of such last pilot unit.
After Baasel's original deposit of Escrowed Materials, Baasel will be obligated
to deliver new and/or updated Escrowed Materials to the Escrow Agent promptly
after the content of the Escrowed Materials may have changed (including new
items or changes to already deposited items) or new Escrowed Materials have come
into existence from the most recent deposit of Escrowed Materials; provided,
however, that Baasel will not be obligated to deposit into the Manufacturing
Escrow any materials specifically relating to the Cost-Reduced Product, other
than such materials as were deposited in Baasel's original deposit into the
Manufacturing Escrow, until forty-five (45) days after the date of shipment by
Baasel of the first unit of Cost-Reduced Product to CardioGenesis under a
Rolling Purchase Order. Within ten (10) days after Baasel's initial deposit of
Escrowed Materials into the Manufacturing Escrow, and within ten (10) days after
any subsequent deposit by Baasel of Escrowed Materials into the Manufacturing
Escrow as required by this Agreement, Baasel will give CardioGenesis written
notification, in reasonable detail, of the nature of the Escrowed Materials so
deposited by Baasel. Upon reasonable advance written notice by CardioGenesis to
the Escrow Agent with a copy to Baasel, or upon such specific advance written
notice as the Escrow Agent may require, CardioGenesis will have access to the
Escrowed Materials, at the location specified by the Escrow Agent, solely for
purposes of determining the nature and content of such Escrowed Materials and
determining that, in CardioGenesis' reasonable and good faith judgment, they are
sufficient to allow CardioGenesis to fully use the Manufacturing License should
it become necessary to do so. Except as may be otherwise agreed in writing by
CardioGenesis and Baasel in advance of any such inspection, CardioGenesis will
make no copies of, and will not take away any notes as to, the contents of such
inspected Escrowed Materials, and all of such Escrowed Materials will continue
to be subject to provisions of Section 11 hereof with respect to
confidentiality.
(iii) Nature of Manufacturing Escrow. The Escrow Agent
will hold all of the Escrowed Materials in the Manufacturing Escrow separate
from the books, records or materials of CardioGenesis or of any other third
party who may have deposited items with such Escrow Agent. The terms of the
Escrow Agreement will impose upon the Escrow Agent a requirement of
confidentiality with respect to the Escrowed Materials at least as protective of
the Escrowed Materials as those afforded by Section 11 of this Agreement to the
Confidential Information of the parties hereto and to Baasel Proprietary
Information and CardioGenesis Proprietary Information.
(iv) Release of Escrowed Materials To CardioGenesis or To
Baasel. The Escrow Agreement will provide that (i) upon delivery by
CardioGenesis of a Manufacturing License Election Notice, as provided below, and
provided injunctive relief has not been granted in favor of Baasel barring such
access to CardioGenesis, then CardioGenesis will be given full access to all
Escrowed Materials by the Escrow Agent solely for purpose of the Manufacturing
License, and (ii) Baasel's signature or acceptance as to any such release of
Escrowed Materials is not required, and (iii) all Escrowed Materials will be
released to Baasel upon Baasel's written
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<PAGE> 28
request to the Escrow Agent at the expiration or termination of the Escrow
Agreement unless CardioGenesis then is using the Manufacturing License pursuant
to the terms of this Agreement.
(v) Reimbursement of Certain Costs of Baasel by
CardioGenesis; Payment of Escrow Agent's Fees and Costs. CardioGenesis will
reimburse Baasel for Baasel's documented expenses and direct labor costs for
providing such Escrowed Materials into the Manufacturing Escrow, and will pay
the fees and costs of such Escrow Agent.
(vi) Right of CardioGenesis or Baasel to Terminate This
Agreement For Failure To Enter Into Escrow Agreement; Right of CardioGenesis to
Terminate If Baasel Does Not Make Deposits of Escrowed Materials. If the parties
have not entered into a mutually satisfactory Escrow Agreement by June 30, 1997,
or by such later time as they may agree in writing, then either party may at any
time thereafter terminate this Agreement by written notice to the other. If,
upon CardioGenesis' inspection of the Escrowed Materials from time to time as
permitted under Section 10(a)(ii) hereof, CardioGenesis determines in good
faith, after reasonable consultation with Baasel, that the Escrowed Materials
are not complete or sufficient for purposes of the operation of the
Manufacturing License, CardioGenesis will deliver a written notice to Baasel
specifying in reasonable detail the nature and general content of such materials
as CardioGenesis believes in good faith should also be deposited into the
Manufacturing Escrow as part of the Escrowed Materials. If Baasel fails to
deposit such requested materials into the Manufacturing Escrow within forty-five
(45) business days (as defined in Section 5(b) hereof) after the date it
receives such notice, or within such longer time period, without requiring
CardioGenesis' consent, as Baasel reasonably and in good faith request by
notifying CardioGenesis of such longer period, but in no event to exceed ninety
(90) days, then CardioGenesis may terminate this Agreement by written notice to
Baasel.
(vii) Right of Baasel To Terminate This Agreement For
Certain Acts of CardioGenesis.
(A) Unlawful Obtaining Of Escrow Materials;
Unlawful Use of Manufacturing License. If CardioGenesis obtains the Escrowed
Materials, or any portion of them, unlawfully (as defined in Section 10(a)(vii)
hereof), or commences use of the Manufacturing License unlawfully (as so
defined), then Baasel may upon written notice to CardioGenesis immediately
terminate this Agreement, and upon such termination the Manufacturing License
will become null and void and CardioGenesis will have no right thereafter to the
Escrowed Materials or to use the Manufacturing License.
(B) Definition of "Unlawful". For purposes of this
Section 10(a)(vii), the term "unlawful" means (1) as to obtaining all or any
portion of the Escrowed Materials, that CardioGenesis or any of its agents under
its control or at its direction obtain the Escrowed Materials or any portion
thereof, in whole or in part by fraud of CardioGenesis or of any such agent, in
any written statement or notice, or in any oral statement, to Baasel, the Escrow
Agent, or any third party, or otherwise in violation of this Agreement and/or of
the Escrow Agreement, except as provided in the last sentence of this Section
10(a)(vii)(B) as to inadvertent receipt, and (2) as to use of the Manufacturing
License, that CardioGenesis or any of its agents under its control or at its
direction commence using the Manufacturing Agreement by fraud of
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<PAGE> 29
CardioGenesis or of any such agent, in any written statement or notice, or in
any oral statement, to Baasel, the Escrow Agent, or any third party, or
otherwise in violation of the terms of this Agreement. If CardioGenesis obtains
all or any part of the Escrowed Materials from the Escrow Agent by reason of the
mistake or willful act of the Escrow Agent and/or of the agents of the Escrow
Agent, and not at CardioGenesis' request, CardioGenesis will not be deemed to
have received such Escrowed Materials unlawfully, for purposes of this Section
10(a)(vii), and thus will not have breached its obligations under this
Agreement, if CardioGenesis (1) returns all of such Escrowed Materials to the
Escrow Agent as promptly as commercially reasonable after CardioGenesis
determines that it is not then supposed to have such Escrowed Materials under
the terms of this Agreement and/or of the Escrow Agreement, and (2) retains no
copies of such Escrowed Materials, and (3) promptly notifies the Escrow Agent
and Baasel in writing of such matters.
(b) Manufacturing License.
(i) General Grant of License Rights. Baasel hereby grants
to CardioGenesis an irrevocable, exclusive, royalty-bearing, worldwide license
in perpetuity (the "Manufacturing License"), under the terms and conditions set
forth herein, which CardioGenesis may use only upon the occurrence of a
Noncurable Triggering Event, and only if CardioGenesis has timely delivered a
Manufacturing License Election Notice to Baasel as provided in Section 10(c)
hereof and such use of the Manufacturing License has not been enjoined by
judicial action, to use the Escrowed Materials and the other materials described
below in this Section 10(b)(i), solely in order for CardioGenesis, itself and/or
through its subcontractors, to manufacture, and solely for CardioGenesis and its
distributors, agents and representatives to sell and distribute, on a worldwide
exclusive basis, OEM Products and Parts as incorporated in (or, as to Parts, to
be incorporated in) CardioGenesis Products.. The rights of CardioGenesis under
the Manufacturing License will survive any expiration or termination of this
Agreement. Upon and after activation of the Manufacturing License under the
terms hereof (A) CardioGenesis will have the right to use all Escrowed Materials
deposited into the Manufacturing Escrow, as well as all other materials that
would constitute Escrowed Materials hereunder but which have not been deposited
by Baasel into the Manufacturing Escrow at the time of activation of the
Manufacturing License, and (B) Baasel will supply to CardioGenesis directly,
upon CardioGenesis' written request specifying in such reasonable detail as to
such non-deposited materials as is known to CardioGenesis at the time, at no
cost to CardioGenesis one complete and accurate copy of such other non-deposited
materials so requested. The provisions of Section 11 hereof will apply to all
such non-deposited materials as may be delivered by Baasel to CardioGenesis. The
Manufacturing License includes the right of CardioGenesis to sublicense to
CardioGenesis' designated subcontractor manufacturers. The provisions of Section
3(b) hereof with respect to Baasel's Software and Updates are incorporated into
the Manufacturing License by reference.
(ii) Sublicenses to Subcontract Manufacturers. The terms
of any sublicense by CardioGenesis to any subcontract manufacturer will contain
confidentiality provisions consistent with the provisions of Section 11 hereof
with respect to the protection of Baasel Proprietary Information and Baasel
Confidential Information, and will not afford such subcontract manufacturer any
rights to further sublicense such rights, nor any rights to sell or otherwise
distribute OEM Products or Parts other than to CardioGenesis.
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<PAGE> 30
(iii) Certain Limitations of CardioGenesis' Rights.
CardioGenesis may not use the Manufacturing License after expiration hereof, or
after termination hereof if such termination is by Baasel by reason of
CardioGenesis' uncured breach of this Agreement, or if such termination is
pursuant to the provisions of (A) Section 1(b)(i) hereof due to CardioGenesis'
termination of the Development Efforts, and (B) Section 1(b)(ii) hereof because
the parties cannot agree on appropriate adjustments to the payments for the
Development Efforts, or (C) Section 6(b) hereof because the parties cannot agree
on pricing, or (D) Section 10(a)(v) hereof because the parties have not timely
entered into the Escrow Agreement; provided that in each case, the provisions of
Section 9(a) hereof, with respect to post-termination fulfillment of
CardioGenesis' orders, and Section 9(b) hereof, with respect to certain
cooperation by Baasel as to manufacturing transition, nevertheless will apply.
(c) Noncurable Triggering Event Notice; Noncurable Triggering
Event Notice; Manufacturing License Election Notice. Within ten (10) days after
CardioGenesis believes a Noncurable Triggering Event has occurred, CardioGenesis
will give written notice thereof ( a "Noncurable Triggering Event Notice") to
Baasel and to the Escrow Agent, specifying in reasonable detail the nature of
such Noncurable Triggering Event (including the expiration of the relevant cure
period for any Curable Triggering Event). Baasel will have the right to seek
judicial injunctive relief, as provided in Section 15 hereof, if it believes
that the relevant Noncurable Triggering Event has not occurred. The
Manufacturing License may be used by CardioGenesis only if, within thirty (30)
days after the occurrence of such Noncurable Triggering Event, CardioGenesis
also gives written notice (a "Manufacturing License Election Notice") to the
Escrow Agent and to Baasel stating CardioGenesis' election to use the
Manufacturing License (which Manufacturing License Election Notice may be
included in the original Noncurable Triggering Event Notice), and provided that
the use by CardioGenesis of the Manufacturing License has not been enjoined by
judicial action. If CardioGenesis gives Baasel a Manufacturing License Election
Notice, the Manufacturing License may not be activated and used by CardioGenesis
prior to the expiration of such thirty day (30) period after occurrence of such
Noncurable Triggering Event. If CardioGenesis does not elect in writing to
Baasel within thirty (30) days after the occurrence of a Noncurable Triggering
Event to terminate this Agreement, or if CardioGenesis' use of the Manufacturing
License then is enjoined by judicial action, this Agreement will continue until
otherwise terminated or expired, and the Manufacturing License will not be
activated, provided that such failure to elect to so terminate, or the granting
of such injunctive relief to Baasel, will not preclude CardioGenesis from
electing to terminate, and to activate the Manufacturing License (subject to
Baasel's rights again to seek injunctive relief), with respect to the occurrence
of any future Noncurable Trigger Event.
(d) Manufacturing Royalty. If CardioGenesis elects as provided
herein to use the Manufacturing License, CardioGenesis will pay to Baasel,
within [ ** ] after the close of each calendar quarter during which the
Manufacturing License is used, a manufacturing royalty (the "Manufacturing
Royalty") in an amount, in cash, equal to [ ** ]. CardioGenesis will submit to
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Baasel, with each such payment of accrued royalties, a written statement, signed
by CardioGenesis' Chief Financial Officer, in reasonable detail showing the
basis for the calculation of the royalty amount remitted. Baasel may at Baasel's
expense, and subject to such reasonable written mutual confidentiality
agreements as CardioGenesis may request, review those portions of the books and
records of CardioGenesis relating to such calculation. In the event such review
determines any underpayment of such royalties, CardioGenesis will promptly pay
such underpayment amount to Baasel. During its use of the Manufacturing License,
CardioGenesis will not be liable for payment to Baasel for any amount other than
the Manufacturing Royalty with respect to the manufacture by CardioGenesis and
its designated third party subcontract manufacturers, and the sale by
CardioGenesis and its distributors, sales agents, and representatives, of OEM
Products and/or Parts.
11. CONFIDENTIAL INFORMATION.
(a) Definition. The term "Confidential Information" as used
herein includes, as to CardioGenesis, the CardioGenesis Proprietary Information
and as to Baasel, the Baasel Proprietary Information, and as to each party, such
party's other proprietary and confidential information of whatever sort.
Confidential Information of either party will not include information which:
(i) is now, or hereafter becomes, through no act or
failure to act on the part of the receiving party, generally known or available
to the public;
(ii) was acquired by the receiving party before receiving
such information from the disclosing party and without restriction as to use or
disclosure;
(iii) is hereafter rightfully furnished to the receiving
party by a third party, without restriction as to use or disclosure;
(iv) is information which the receiving party can document
was independently developed by the receiving party;
(v) is required to be disclosed pursuant to law, provided
the receiving party uses reasonable efforts to give the disclosing party
reasonably detailed notice of such required disclosure; or
(vi) is disclosed with the prior written consent of the
disclosing party.
(b) Obligations. Except as may be specifically authorized
otherwise in this Agreement, or as may be otherwise specifically agreed by the
parties in writing, each party will:
(i) hold the other party's Confidential Information in
strict confidence,
(ii) not disclose such Confidential Information to any
third parties and will take all reasonable steps to prevent such disclosure,
which steps will include at least those taken by such party to protect its own
confidential information of like kind, and
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(iii) not use any Confidential Information of the other
party for any purpose except as provided in this Agreement.
Each party may disclose the other party's Confidential
Information to the recipient party's responsible employees and consultants who
have a bona fide need to know, but only to the extent necessary to carry out the
purposes of this Agreement. Each party will instruct all such employees and
consultants not to disclose such Confidential Information to third parties,
including other consultants, without the prior written permission of the
disclosing party hereto.
(c) Return of Items. Subject to the rights of the parties under
other provisions of this Agreement, including without limitation the rights of
CardioGenesis under Section 10 of this Agreement, upon the disclosing party's
written request, the receiving party will promptly return to the disclosing
party all tangible items containing or consisting of the disclosing party's
Confidential Information and all copies thereof.
12. INDEMNITY; LIABILITY; INSURANCE.
(a) Indemnity by Baasel. Subject to the other provisions of this
Section 12, Baasel will, at its expense, defend and indemnify CardioGenesis and
CardioGenesis' directors, officers, employees, consultants, agents, shareholders
and customers, in any suit, claim or proceeding brought against CardioGenesis or
any of such other indemnified parties:
(i) Alleged Infringement. Alleging that any OEM Products
or Parts sold pursuant to this Agreement, as such, as apart from their use in
the CardioGenesis Use, infringe a United States patent, United States copyright,
United States trademark or trade secret obligation of any third party; provided
that Baasel will have no liability to the extent of any infringement alleged by
third parties rights arising from the CardioGenesis Use or with respect to
alleged infringement of general laser industry patents, not keyed to Baasel's
specific laser before its modification into the OEM Product, for which
infringement allegations CardioGenesis will be responsible; or
(ii) Defect In Manufacture or Design. Due directly to any
defect in manufacture or design of the OEM Product as developed by Baasel.
CardioGenesis will promptly notify Baasel of any such claim.
Baasel will be given reasonable assistance from CardioGenesis and will be
permitted the exclusive control of the defense. Further, to the extent Baasel is
required hereunder to indemnify such parties, Baasel will pay any damages and
costs finally awarded against CardioGenesis and any such other indemnified
parties in any such suit by reason of any such liability, but Baasel will have
no liability for settlements or costs incurred without its written consent.
If CardioGenesis' or its customers' use of any such OEM Products
and Parts is enjoined, or Baasel desires to minimize its liability hereunder as
to any alleged infringement, Baasel may, at its option and sole expense, either:
(i) Substitution. Substitute to CardioGenesis or
CardioGenesis 'customer, equivalent noninfringing OEM Products and/or Parts for
the allegedly infringing item,
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subject to CardioGenesis' absolute right of approval as to whether such
substituted OEM Products and/or Parts meet all specifications required therefor,
including U.S. and international regulatory requirements, as determined by
CardioGenesis in good faith, or
(ii) Modification. Modify the substituted infringing item
so that it no longer infringes but remains equivalent in the reasonable and good
faith judgment of CardioGenesis, subject to CardioGenesis' absolute right of
approval as to whether such modified OEM Products and/or Parts meet all
specifications thereof, including U.S. and international regulation
requirements, as determined by CardioGenesis in good faith or
(iii) Obtain Rights. Obtain for CardioGenesis and
CardioGenesis' customer, the right to continue using such item.
If none of the foregoing is feasible in Baasel's good
faith judgment, Baasel will accept a return of the OEM Products and/or Parts
from CardioGenesis or CardioGenesis' customer, which are subject to the
allegation or to such injunction, and Baasel then will refund, to CardioGenesis
or CardioGenesis' customer, the purchase price therefor plus costs to Baasel of
shipping paid by CardioGenesis or CardioGenesis' customer, less reasonable
depreciation.
(b) Indemnity by CardioGenesis. Subject to the other provisions
of this Section 12, CardioGenesis will, at its expense, defend and indemnify
Baasel and its directors, officers, employees, consultants, agents, shareholders
and customers, in any suit, claim or proceeding brought against Baasel or any of
such other indemnified parties, alleging that:
(i) Alleged Infringement. Any CardioGenesis Proprietary
Information contained in any OEM Products or Parts sold pursuant to this
Agreement, as such, infringes a United States patent, United States copyright,
United States trademark or trade secret obligation of any third party, or
(ii) Defect in Manufacture or Design. Due directly to any
defect in manufacture or design of the OEM Product other than for which Baasel
is liable under Section 12(a) hereof.
Baasel will promptly notify CardioGenesis of any such
claim. CardioGenesis will be given reasonable assistance from Baasel and will be
permitted the exclusive control of the defense. Further, to the extent
CardioGenesis is required hereunder to indemnify such parties, CardioGenesis
will pay any damage and costs finally awarded against Baasel and any such other
indemnified parties in any such suit by reason of any such liability, but
CardioGenesis will have no liability for settlements or costs incurred without
its written consent.
If Baasel's use of any such CardioGenesis Proprietary
Information in the production by Baasel of OEM Products and Parts hereunder is
enjoined, or CardioGenesis desires to minimize its liability hereunder as to
such alleged infringement, CardioGenesis may, at its option and sole expense,
either:
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(i) Substitution. Substitute to Baasel equivalent
noninfringing CardioGenesis Proprietary Information for the allegedly infringing
item,
(ii) Modification. modify the allegedly infringing item so
that it no longer infringes but remains equivalent in the reasonable and good
faith judgment of CardioGenesis and Baasel, or
(iii) Obtain Rights. Obtain for Baasel the right to
continue using such item.
If none of the foregoing is feasible in the good faith
judgment of either Baasel or CardioGenesis, either party may give the other
notice that, unless the parties negotiate and reflect in writing within thirty
(30) days a commercially reasonable solution, which the parties will in good
faith attempt to do, then either party may terminate this Agreement by written
notice to the other party at any time after the such thirty (30) days; provided,
however, that in the event of any such termination by either party, Section
10(b) hereof will not apply and CardioGenesis will have no rights thereafter
under the Manufacturing License.
(c) CardioGenesis Liability. Subject to Baasel's indemnities and
warranties contained herein and in Baasel's relevant warranty as supplied with
the OEM Products and Parts, CardioGenesis and CardioGenesis' customers assume
all risk and liability arising from or connected with the operation and use of
the OEM Product and Parts. Baasel's maximum liability for all damages,
regardless of the legal basis therefor but excluding willful acts against
CardioGenesis, will be limited to the sum of all payments made by CardioGenesis
to Baasel with respect to the goods at issue in the dispute. Baasel's liability
under the German Product Liability Code is reserved.
(d) Limitations.
(i) Baasel Limitations. Baasel will have no liability for
any claim of patent or copyright infringement or other infringement of
proprietary rights, or any liability for design or manufacture, to the extent
resulting from:
(A) CardioGenesis' or CardioGenesis' customers',
use or combination of the OEM Products, or Parts, or of Baasel's Software or
Updates, with products or data, other than the CardioGenesis Products, not
supplied by Baasel as part of the OEM Products, or Parts, or as part of Baasel's
Software or Updates, or
(B) any modification or attempted modification of
the OEM Products or Parts or Baasel's Software or Updates by anyone other than
Baasel, or other than by third parties agreed in writing by Baasel, or
(C) use of other than the latest release of
Baasel's Software or Updates received by CardioGenesis or CardioGenesis'
customers from Baasel.
(ii) CardioGenesis Limitations. CardioGenesis will have no
liability for any claim of patent or copyright infringement or other
infringement of proprietary rights, or any liability for design or manufacture,
to the extent resulting from:
(A) Baasel's use or combination, in producing the
OEM Products or Parts, or producing Baasel's Software or Updates, with products
or data, other than
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the CardioGenesis Proprietary Rights or CardioGenesis Products, not supplied by
CardioGenesis to Baasel in order for Baasel to produce the OEM Products, or
Parts, or Baasel's Software or Updates, or
(B) any modification or attempted modification of
the CardioGenesis Proprietary Rights or CardioGenesis Products by anyone other
than CardioGenesis, or other than by Baasel with CardioGenesis' written
permission in the course of the Development Efforts.
(iii) General Mutual Limitation. IN NO EVENT WILL EITHER
PARTY BE LIABLE TO THE OTHER IN CONNECTION WITH THIS AGREEMENT FOR SPECIAL,
INCIDENTAL, INDIRECT OR CONSEQUENTIAL OR PUNITIVE DAMAGES REGARDLESS OF WHETHER
EITHER OR BOTH PARTIES OR BAASEL KNEW OF THE POSSIBILITY OF SUCH DAMAGES.
(e) Insurance. Subject to the provisions of Section 6(d)(iii)(C)
hereof relating to possible price adjustments deriving from the cost of products
liability insurance of Baasel as to OEM Products and Parts to be sold in the
United States, Baasel and CardioGenesis each will at all times during the term
hereof obtain and maintain, at the obtaining party's expense, fire and casualty,
general liability, business interruption, and product liability insurance
relating to the business of such party, taking into account such party's
respective obligations under this Agreement, and taking into account the nature
of the OEM Products and Parts, in amounts (including tail coverage) customary
for its industry and size, with reputable insurers, with respect to such product
liability insurance. In particular, CardioGenesis will obtain and maintain
product liability coverage with respect to the OEM Products in an amount, and
with such coverage, and for such periods of time, as are customary, within the
industry within which the OEM Products would be considered to be included by
national-level United States medical products insurers, according to the type of
product so considered and according to the particular use (i.e., clinical or
commercial) to which the OEM Products will be used in the jurisdiction to which
such insurance relates. The parties will agree in writing, as an amendment to
this Section 12(e), as to the United States dollar amount of such coverage for
the relevant jurisdictions, no later than June 30, 1997, after consultation by
CardioGenesis with its insurance brokers and with Baasel.
13. REPRESENTATIONS AND WARRANTIES OF BAASEL.
Baasel hereby represents and warrants to CardioGenesis as follows
(where a representation is made "to the best knowledge" of Baasel, such
representation will be based upon reasonable inquiry into the records and of the
employees of Baasel and reasonable inquiry of the advisors and/or other agents
of Baasel):
(a) Organization and Good Standing. Baasel is a corporation duly
organized and validly existing under the laws of Germany, has the corporate
power and authority to own, operate and lease its properties and to carry on its
business as now conducted.
(b) Power, Authorization and Validity.
(i) Authorization. No filing, authorization or approval
with or from governmental authorities by Baasel is necessary to enable Baasel to
enter into, and to perform, its obligations under this Agreement.
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(ii) Valid and Binding Obligation. This Agreement is the
valid and binding obligation of Baasel, enforceable in accordance with its terms
except as to the effect, if any, of (A) applicable bankruptcy and other similar
laws affecting the rights of creditors generally, (B) rules of law governing
specific performance, injunctive relief and other equitable remedies, and (C)
the exercise of judicial discretion in accordance with general principles of
equity.
(c) No Violation of Existing Agreements. Neither the execution
and delivery of this Agreement, nor the consummation of the transactions
contemplated hereby, will conflict with, or (with or without notice or lapse of
time, or both) result in a termination, breach, impairment or violation of: (i)
any provision of the Certificate of Incorporation or Bylaws of Baasel, as
currently in effect, (ii) any instrument or contract to which Baasel is a party
or by which Baasel is bound, or (iii) to the best knowledge of Baasel, any
German, European Union or foreign judgment, writ, decree, order, statute, rule
or regulation applicable to Baasel or its assets or properties in any material
respect.
(d) Litigation. Baasel has not received notice of any action,
proceeding, claim or investigation pending against Baasel before any court or
administrative agency that if determined adversely to Baasel may be expected to
have a material adverse effect on the present or future operations or financial
condition of Baasel. To the best knowledge of Baasel, after due inquiry, no such
action, proceeding, claim or investigation has been threatened.
(e) Intellectual Property. Baasel owns or has sufficient rights
to use all patents, "Moral Rights" (as defined below), copyrights, trade
secrets, know-how, technology and other intellectual property and proprietary
rights reasonably necessary to the conduct of the business as presently
conducted by Baasel and as will be required for the performance by Baasel of its
obligations hereunder ("Baasel Intellectual Property"). "Moral Rights" means any
rights of paternity or integrity, any right to claim authorship, formula,
invention, improvement, original work of authorship, process, computer program,
database or trade secret ("Invention"), and any right to object to any
distortion, mutilation or other modification of, or other derogatory action in
relation to, any Invention, whether or not such would be prejudicial to any
developer's honor or reputation. No third party has any right of reversion or
tenancy in the Baasel Intellectual Property that would impair in any way the
ability of Baasel to fully perform its obligations under this Agreement or that
would impair in any way the rights and benefits of CardioGenesis under this
Agreement. Baasel is not aware of any infringement of Baasel Intellectual
Property by any third party. To the best of Baasel's knowledge, the business of
Baasel as presently conducted by Baasel and as will be required for the
performance by Baasel of its obligations hereunder does not cause Baasel, and
will not cause CardioGenesis, by use of Baasel as an OEM Product and Parts
manufacturer and supplier to CardioGenesis as provided herein, to infringe or
violate any of the patents, trademarks, service marks, trade names, copyrights,
trade secrets, proprietary rights or other intellectual property of any other
person, and Baasel has not received any claim or notice of infringement or
potential infringement of the intellectual property of any other person. To the
best knowledge of Baasel, Baasel is not using any confidential information or
trade secrets of any former employer of any past or present Baasel employees or
consultants.
14. REPRESENTATIONS AND WARRANTIES OF CARDIOGENESIS.
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CardioGenesis hereby represents and warrants to Baasel as follows
(where a representation is made "to the best knowledge" of CardioGenesis, such
representation will be based upon reasonable inquiry into the records and of the
employees of CardioGenesis and reasonable inquiry of the advisors and/or other
agents of CardioGenesis):
(a) Organization and Good Standing. CardioGenesis is a
corporation duly organized and validly existing under the laws of the State of
Delaware, has the corporate power and authority to own, operate and lease its
properties and to carry on its business as now conducted.
(b) Power, Authorization and Validity.
(i) Right, Power and Authority. CardioGenesis has the
right, power, legal capacity and authority to enter into and perform its
respective obligations under this Agreement, and the execution, delivery and
performance of this Agreement have been duly and validly approved and authorized
by CardioGenesis and no other corporate approvals are required therefor under
the laws of the State of Delaware or California.
(ii) Authorization. No U.S. federal or state filing,
authorization or approval with or from governmental authorities by CardioGenesis
is necessary to enable CardioGenesis to enter into, and to perform, its
obligations under this Agreement.
(iii) Valid and Binding Obligation. This Agreement is the
valid and binding obligation of CardioGenesis, enforceable in accordance with
its terms except as to the effect, if any, of (A) applicable bankruptcy and
other similar laws affecting the rights of creditors generally, (B) rules of law
governing specific performance, injunctive relief and other equitable remedies,
and (C) the exercise of judicial discretion in accordance with general
principles of equity.
(c) No Violation of Existing Agreements. Neither the execution
and delivery of this Agreement, nor the consummation of the transactions
contemplated hereby, will conflict with, or (with or without notice or lapse of
time, or both) result in a termination, breach, impairment or violation of: (i)
any provision of the Certificate of Incorporation or Bylaws of CardioGenesis, as
currently in effect, (ii) any instrument or contract to which CardioGenesis is a
party or by which CardioGenesis is bound, or (iii) to the best knowledge of
CardioGenesis, any federal, state, local or foreign judgment, writ, decree,
order, statute, rule or regulation applicable to CardioGenesis or its assets or
properties in any material respect.
(d) Intellectual Property. CardioGenesis owns or has sufficient
rights to use all patents, "Moral Rights" (as defined below), copyrights, trade
secrets, know-how, technology and other intellectual property and proprietary
rights reasonably necessary to the licenses by CardioGenesis hereunder to Baasel
and as will be required for the performance by CardioGenesis of its obligations
hereunder ("CardioGenesis Intellectual Property"). "Moral Rights" means any
rights of paternity or integrity, any right to claim authorship, formula,
invention, improvement, original work of authorship, process, computer program,
database or trade secret ("Invention"),
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and any right to object to any distortion, mutilation or other modification of,
or other derogatory action in relation to, any Invention, whether or not such
would be prejudicial to any developer's honor or reputation. CardioGenesis is
not aware of any infringement of CardioGenesis Intellectual Property by any
third party. To the best of CardioGenesis' knowledge, the use by Baasel of
CardioGenesis Intellectual Property as permitted and required by this Agreement
will not cause Baasel, as an OEM Product and Parts manufacturer and supplier to
CardioGenesis as provided herein, to infringe or violate any of the patents,
trademarks, service marks, trade names, copyrights, trade secrets, proprietary
rights or other intellectual property of any other person, and CardioGenesis has
not received any claim or notice of infringement or potential infringement of
the intellectual property of any other person.
(e) No Violation of Existing Agreements. Neither the execution
and delivery of this Agreement, nor the consummation of the transactions
contemplated hereby, will conflict with, or (with or without notice or lapse of
time, or both) result in a termination, breach, impairment or violation of: (i)
any provision of the Articles of Incorporation or Bylaws of CardioGenesis, (ii)
any instrument or contract to which CardioGenesis is a party or by which
CardioGenesis is bound or (iii) to the best knowledge of CardioGenesis, any
federal, other national, state, local or foreign judgment, writ, decree, order,
statute, rule or regulation applicable to CardioGenesis or its assets or
properties in any material respect.
15. GOVERNING LAW; DISPUTE RESOLUTION.
(a) Governing Law. This Agreement will be governed by and
construed under the laws of the State of California excluding the Convention on
Contracts for the International Sale of Goods and excluding that body of law
known as conflict of laws. The procedural laws of the court in which a
good-faith injunctive relief action is brought by either party pursuant to its
rights under Section 15(a)(vii) hereof will control as to the procedure of such
action.
(b) Dispute Resolution. Any dispute arising out of or related to
this Agreement, including any dispute which relates to the Confidential
Information of either party, or to Baasel Proprietary Information or to
CardioGenesis Proprietary Information, will be subject to the following
provisions:
(i) Rules and Location. Such dispute will be determined by
arbitration under the Rules of the International Chamber of Commerce (the
"ICC"), in Munich, Germany if brought by CardioGenesis, or in San Francisco,
California if brought by Baasel, before a panel of three (3) arbitrators to be
appointed in accordance with such Rules.
(ii) Language. The language of the arbitration will be
English.
(iii) Arbitrator Qualifications. Each arbitrator must be
reasonably fluent in English, and must have reasonable experience with high
technology commercial companies or with arbitration of matters involving high
technology commercial companies.
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(iv) Fees and Costs. The arbitrators will rule on the fees
and costs of the arbitration.
(v) Governing Law of Arbitration. The laws of the State of
California excluding the Convention on Contracts for the International Sale of
Goods, and excluding that body of law known as conflict of laws, will be the
applicable substantive law, provided that ICC procedural laws will govern the
arbitration procedure.
(vi) Award. The award of the arbitrators will be final and
binding upon the parties, and judgment upon the award may be entered in any
court having jurisdiction, and an application may be made to any such court for
judicial acceptance of the award and an order of enforcement.
(vii) Right to Seek Injunctive Relief. Each party retains
the right to seek immediate injunctive judicial relief, in whichever court is
appropriate, whether in Germany, California (federal and State courts) or
elsewhere in the world, each party hereby consenting to in personam
.jurisdiction of and venue in such court(s), as to alleged breaches of this
Agreement which, in the good faith judgment of the initiating party, would cause
irreparable harm to such party for which damages would not be a sufficient or
appropriate remedy and the amount of which damages would be difficult to
ascertain.
(b) Legal Expenses. The prevailing party in any injunctive action
brought by one party against the other and arising out of this Agreement will be
entitled, in addition to any other rights and remedies it may have, to
reimbursement for its expenses, including court costs and reasonable attorneys'
fees and costs, provided, however, that reimbursement of such attorney's fees
and costs will not exceed ten percent (10 %) of the total amount (exclusive of
such fees and costs) in dispute.
16. GENERAL PROVISIONS.
(a) Entire Agreement. This Agreement sets forth the entire
agreement and understanding of the parties relating to the subject matter herein
and merges and supersedes all prior agreements between them with respect to such
specific subject matter. No modification of or amendment to this Agreement, nor
any waiver of any rights under this Agreement, will be effective unless in
writing signed by both parties.
(b) Independent Contractors. The relationship of Baasel and
CardioGenesis under this Agreement is that of independent contractors, and
nothing contained in this Agreement will be construed to give either party the
power to direct and control the day-to-day activities of the other, or to create
or assume any obligation on behalf of the other for any purpose whatsoever. All
financial obligations associated with each party's business are the sole
responsibility of such party.
(c) Notices. Any notice required or permitted by this Agreement
will be in writing and will be sent by hand (including commercially-recognized
international courier), or by prepaid registered or certified airmail, return
receipt requested where possible, or by facsimile, in
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each case addressed to the other party at the address below such party's
signature hereon, or at such other address for which such party gives notice
hereunder. Such notice will be deemed to have been given when delivered if by
hand, or five (5) days after deposit in the mail (sent airmail, postage
pre-paid), or upon receipt if sent by facsimile.
(d) Force Majeure. Nonperformance of either party will be excused
to the extent and for the period that performance by such party is rendered
impossible by strike, fire, flood, governmental acts or orders or restrictions
(other than such orders or restrictions arising as a result of the action or
failure to act by such nonperforming party), failure of suppliers, or any other
reason where failure to perform is beyond the reasonable control of and is not
caused by the negligence of the nonperforming party.
(e) Nonassignability and Binding Effect. Neither CardioGenesis'
nor Baasel's rights and obligations under this Agreement may be transferred or
assigned without the prior written consent of the other party, which will not be
unreasonably withheld. Subject to the foregoing sentence, this Agreement will be
binding upon and inure to the benefit of the respective successors and assigns
of the parties hereto.
(f) Severability. If any provision of this Agreement is held
invalid by any law, rule, order or regulation of any government, or by the final
determination of any state or federal court, such invalidity will not affect the
enforceability of any other provisions not held to be invalid, and such
provision will be enforced to the maximum extent legally possible.
(g) Import/Export Regulations. CardioGenesis and Baasel will
comply with all regulations, both U.S. and international, with respect to the
importation and exportation of OEM Products and Parts, and as to CardioGenesis
Products, by CardioGenesis, and as to products of Baasel manufactured and/or
supplied by Baasel pursuant to its rights under Section 3(d) hereof.
(h) Publicity Regarding Agreement. Neither party will disclose
the terms of this Agreement to any third parties except as may be mutually
agreed in writing or as may be required by, and then only to the extent required
by, statute, regulation or the order of a court of competent jurisdiction.
(i) Counterparts. This Agreement may be executed in two or more
counterparts, each of which will be deemed an original and all of which together
will constitute one instrument.
(j) Construction. This Agreement has been negotiated by each of
the parties with advice of counsel. This Agreement will be fairly interpreted in
accordance with its terms and without any strict construction in favor of or
against either party.
(k) Counting of Time. Whenever time is to be counted hereunder,
the first day will be ignored and counting will commence with and include the
next day and continue through and including the final day of the relevant period
provided for in this Agreement.
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(l) Survival. The provisions of Sections 1(c), 1(d), 1(e), 1(j),
2, 3(b) (as to OEM Products shipped by Baasel prior to such termination and
those that may be shipped after termination pursuant to the provisions of
Section 9(d) hereof), 3(d), 3(e), 4(b), 6(e), 6(f), 7, 8, 9(d), 9(e), 9(f), 10,
11, 12, 13, 14, 15 and 16 will survive the termination or expiration of this
Agreement.
-41-
<PAGE> 42
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed as of the Effective Date by their duly authorized representatives.
CARDIOGENESIS CORPORATION CARL BAASEL LASERTECHNIK GMBH
- ------------------------- -----------------------------
By: /s/ Allen W. Hill By: /s/ Joseph Settele
------------------------------ -----------------------------
Name: ALLEN W. HILL Name: JOSEPH SETTELE
Title: PRESIDENT Title: MANAGING DIRECTOR
Date signed: March 11, 1997 Dated signed: March 13, 1997
Address: 540 Oakmead Parkway Address: Petersbrunner Strasse 1b
Sunnyvale, California 94086 82319 Starnberg, Germany
Attention: President Attention: President
Facsimile: 408-328-3816 Facsimile: 011-49-81-51-776-232
-42-
<PAGE> 43
EXHIBIT A
OEM PRODUCT DESCRIPTION
CARDIOGENESIS CORPORATION CARL BAASEL LASERTECHNIK
GMBH
By: By:
------------------------------ -----------------------------
Name: Name:
---------------------------- ---------------------------
Title: Title:
--------------------------- ---------------------------
Date signed: Date signed:
--------------------- --------------------
<PAGE> 44
** CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE FOLLOWING 23
PAGES OF THIS DOCUMENT. CONFIDENTIAL PORTIONS HAVE BEEN OMITTED FROM THE
PUBLIC FILING AND HAVE BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION.
<PAGE> 45
EXHIBIT B
OEM PRODUCT DEVELOPMENT PROGRAM AND
SPECIFICATIONS FOR FUNCTIONAL, PROTOTYPE AND PILOT UNITS
1. OEM PRODUCT DEVELOPMENT PROGRAM.
[ATTACHED AND INCORPORATED BY REFERENCE]
2. SPECIFICATIONS FOR FUNCTIONAL, PROTOTYPE AND PILOT UNITS.
[ATTACHED AND INCORPORATED BY REFERENCE]
CARDIOGENESIS CORPORATION CARL BAASEL LASERTECHNIK
GMBH
By: By:
------------------------------ -----------------------------
Name: Name:
---------------------------- ---------------------------
Title: Title:
--------------------------- ---------------------------
Date signed: Date signed:
--------------------- --------------------
<PAGE> 46
** CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE FOLLOWING 2
PAGES OF THIS DOCUMENT. CONFIDENTIAL PORTIONS HAVE BEEN OMITTED FROM THE
PUBLIC FILING AND HAVE BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION.
<PAGE> 47
EXHIBIT B
OEM PRODUCT DEVELOPMENT PROGRAM
[ATTACHED AND INCORPORATED BY REFERENCE]
[ ** ]
CARDIOGENESIS CORPORATION GMBHCARL BAASEL LASERTECHNIK
By: By:
------------------------------ -----------------------------
Name: Name:
---------------------------- ---------------------------
Title: Title:
--------------------------- ---------------------------
Date signed: Date signed:
--------------------- --------------------
<PAGE> 48
** CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE FOLLOWING 2
PAGES OF THIS DOCUMENT. CONFIDENTIAL PORTIONS HAVE BEEN OMITTED FROM THE
PUBLIC FILING AND HAVE BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION.
<PAGE> 49
EXHIBIT C
OEM PRODUCT PRICES TO CARDIOGENESIS
** CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THIS PAGE.
CONFIDENTIAL PORTIONS HAVE BEEN OMITTED FROM THE PUBLIC FILING AND HAVE BEEN
FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
CARDIOGENESIS CORPORATION CARL BAASEL LASERTECHNIK
GMBH
By: By:
------------------------------ -----------------------------
Name: Name:
---------------------------- ---------------------------
Title: Title:
--------------------------- ---------------------------
Date signed: Date signed:
--------------------- --------------------
<PAGE> 50
EXHIBIT D
OTHER BAASEL PROPRIETARY INFORMATION;
OTHER CARDIOGENESIS PROPRIETARY INFORMATION
1. OTHER BAASEL PROPRIETARY INFORMATION.
Intellectual Property Rights of Baasel
** CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THIS PAGE.
CONFIDENTIAL PORTIONS HAVE BEEN OMITTED FROM THE PUBLIC FILING AND HAVE BEEN
FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
2. OTHER CARDIOGENESIS PROPRIETARY INFORMATION.
[ATTACHED AND INCORPORATED BY REFERENCE]
CARDIOGENESIS CORPORATION CARL BAASEL LASERTECHNIK
GMBH
By: By:
------------------------------ -----------------------------
Name: Name:
---------------------------- ---------------------------
Title: Title:
--------------------------- ---------------------------
Date signed: Date signed:
--------------------- --------------------
<PAGE> 51
** CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THIS PAGE.
CONFIDENTIAL PORTIONS HAVE BEEN OMITTED FROM THE PUBLIC FILING AND HAVE BEEN
FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
<PAGE> 52
EXHIBIT E
CARDIOGENESIS TRADEMARKS
CardioGenesis
ITMR
TTMR
PMR
ITMR System
TTMR System
PMR System
CARDIOGENESIS CORPORATION CARL BAASEL LASERTECHNIK
GMBH
By: By:
------------------------------ -----------------------------
Name: Name:
---------------------------- ---------------------------
Title: Title:
--------------------------- ---------------------------
Date signed: Date signed:
--------------------- --------------------
<PAGE> 53
EXHIBIT F
PARTS AND PARTS PRICES
[ATTACHED AND INCORPORATED BY REFERENCE]
CARDIOGENESIS CORPORATION CARL BAASEL LASERTECHNIK
GMBH
By: By:
------------------------------ -----------------------------
Name: Name:
---------------------------- ---------------------------
Title: Title:
--------------------------- ---------------------------
Date signed: Date signed:
--------------------- --------------------
<PAGE> 54
EXHIBIT G
ACCEPTANCE CRITERIA
CARDIOGENESIS CORPORATION CARL BAASEL LASERTECHNIK
GMBH
By: By:
------------------------------ -----------------------------
Name: Name:
---------------------------- ---------------------------
Title: Title:
--------------------------- ---------------------------
Date signed: Date signed:
--------------------- --------------------
<PAGE> 55
EXHIBIT H
BAASEL WARRANTY ON OEM PRODUCTS AND PARTS
CardioGenesis or its end-user customer shall, throughout the whole period of
operation of the OEM Product, provide and maintain all operation conditions
reflected in the Baasel operating manuals and other end-user documentation of
Baasel for such OEM Product (the "OEM Product Documentation"), a complete copy
of which OEM Product Documentation shall be supplied with each unit of OEM
Product sold to CardioGenesis or provided by CardioGenesis to its customer.
Baasel warrants that the goods to which this warranty applies shall be free from
defects in material and workmanship for the period of one (1) year for labor and
parts. The warranty period for parts exchanged by Baasel back to the customer
during the parts exchange period will be six (6) months. Damage to parts,
including but not limited to lenses, optical components, flash lamps and the
like, from wear and tear and caused by improper use or handling by CardioGenesis
or the end-user, is not covered by this warranty.
This warranty is contingent upon CardioGenesis or its customer promptly
notifying Baasel in writing of any defect, to operating the relevant product
within the limits of related and normal usage in accordance with the OEM Product
Documentation, and, upon the written request of Baasel, returning to Baasel any
defective goods or parts thereof. If CardioGenesis or its customer, after
acceptance of such goods from Baasel, modifies, alters, substitutes or changes
any of such goods acquired from Baasel, then Baasel's warranty with respect
thereto shall be null and void.
CardioGenesis', and its customers', sole and exclusive remedy with respect to
any claim relating to the goods shall be limited to the repair/replacement of
nonconforming or defective goods.
THIS WARRANTY IS IN LIEU OF ALL OTHER WARRANTIES, EXPRESSED OR IMPLIED,
INCLUDING ANY WARRANTY OF FITNESS OF THE GOODS FOR A PARTICULAR PURPOSE.
CARDIOGENESIS CORPORATION CARL BAASEL LASERTECHNIK
GMBH
By: By:
------------------------------ -----------------------------
Name: Name:
---------------------------- ---------------------------
Title: Title:
--------------------------- ---------------------------
Date signed: Date signed:
--------------------- --------------------
<PAGE> 1
Exhibit 23.01
CONSENT OF COOPERS & LYBRAND L.L.P.,
INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements of
CardioGenesis Corporation on Form S-8 (File Numbers 333-04287 and 333-35095) of
our reports dated January 30, 1998 on our audits of the consolidated financial
statements and financial statement schedule of CardioGenesis Corporation as of
December 31, 1997 and 1996, and for each of the three years in the period ended
December 31, 1997, which reports are included in this Annual Report on Form
10-K.
COOPERS & LYBRAND L.L.P.
San Jose, California
March 30, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FINANCIAL STATEMENTS FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1997 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 6,047
<SECURITIES> 24,469
<RECEIVABLES> 3,293
<ALLOWANCES> 50
<INVENTORY> 1,109
<CURRENT-ASSETS> 36,669
<PP&E> 1,529
<DEPRECIATION> 0
<TOTAL-ASSETS> 48,240
<CURRENT-LIABILITIES> 4,094
<BONDS> 0
0
0
<COMMON> 12
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 48,240
<SALES> 7,559
<TOTAL-REVENUES> 7,559
<CGS> 4,991
<TOTAL-COSTS> 4,991
<OTHER-EXPENSES> 23,358
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (36)
<INCOME-PRETAX> (17,971)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (17,971)
<EPS-PRIMARY> (1.49)
<EPS-DILUTED> (1.49)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 31, 1997 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 4,702
<SECURITIES> 27,899
<RECEIVABLES> 1,644
<ALLOWANCES> 0
<INVENTORY> 1,140
<CURRENT-ASSETS> 2,026
<PP&E> 1,571
<DEPRECIATION> 0
<TOTAL-ASSETS> 52,663
<CURRENT-LIABILITIES> 3,112
<BONDS> 0
0
0
<COMMON> 49,551
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 52,663
<SALES> 5,509
<TOTAL-REVENUES> 5,509
<CGS> 3,448
<TOTAL-COSTS> 3,448
<OTHER-EXPENSES> 16,658
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (12,409)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (12,409)
<EPS-PRIMARY> (1.03)
<EPS-DILUTED> (1.03)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED DECEMBER 31, 1997 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 6,917
<SECURITIES> 35,462
<RECEIVABLES> 3,424
<ALLOWANCES> (304)
<INVENTORY> 680
<CURRENT-ASSETS> 1,437
<PP&E> 2,180
<DEPRECIATION> (588)
<TOTAL-ASSETS> 57,327
<CURRENT-LIABILITIES> 2,923
<BONDS> 0
0
0
<COMMON> 54,404
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 57,327
<SALES> 4,284
<TOTAL-REVENUES> 4,284
<CGS> 2,590
<TOTAL-COSTS> 2,590
<OTHER-EXPENSES> 10,493
<LOSS-PROVISION> 82
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (7,307)
<INCOME-TAX> 0
<INCOME-CONTINUING> (7,307)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,307)
<EPS-PRIMARY> (0.61)
<EPS-DILUTED> (0.61)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED DECEMBER 31, 1997 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 13,690
<SECURITIES> 39,054
<RECEIVABLES> 2,639
<ALLOWANCES> (280)
<INVENTORY> 1,175
<CURRENT-ASSETS> 1,129
<PP&E> 1,504
<DEPRECIATION> 0
<TOTAL-ASSETS> 61,436
<CURRENT-LIABILITIES> 3,412
<BONDS> 0
0
0
<COMMON> 58,204
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 61,436
<SALES> 1,583
<TOTAL-REVENUES> 1,583
<CGS> 1,131
<TOTAL-COSTS> 1,131
<OTHER-EXPENSES> 4,826
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (3,595)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,595)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,595)
<EPS-PRIMARY> (.30)
<EPS-DILUTED> (.30)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FINANCIAL STATEMENTS FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1996 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 2,080
<SECURITIES> 53,626
<RECEIVABLES> 2,024
<ALLOWANCES> 225
<INVENTORY> 1,108
<CURRENT-ASSETS> 60,226
<PP&E> 1,546
<DEPRECIATION> 0
<TOTAL-ASSETS> 64,297
<CURRENT-LIABILITIES> 2,902
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 64,297
<SALES> 3,959
<TOTAL-REVENUES> 3,959
<CGS> 2,866
<TOTAL-COSTS> 2,866
<OTHER-EXPENSES> 12,179
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (33)
<INCOME-PRETAX> (8,800)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,800)
<EPS-PRIMARY> (1.18)
<EPS-DILUTED> (1.18)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED DECEMBER 31, 1996 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 5,638
<SECURITIES> 55,589
<RECEIVABLES> 1,748
<ALLOWANCES> 0
<INVENTORY> 1,124
<CURRENT-ASSETS> 64,941
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 66,434
<CURRENT-LIABILITIES> 2,043
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 66,434
<SALES> 2,968
<TOTAL-REVENUES> 2,968
<CGS> 2,032
<TOTAL-COSTS> 2,032
<OTHER-EXPENSES> 8,027
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (5,654)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,654)
<EPS-PRIMARY> (.95)
<EPS-DILUTED> (.95)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED DECEMBER 31, 1996 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 36,568
<SECURITIES> 27,627
<RECEIVABLES> 1,094
<ALLOWANCES> 0
<INVENTORY> 1,224
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 68,332
<CURRENT-LIABILITIES> 2,038
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 68,332
<SALES> 1,849
<TOTAL-REVENUES> 1,849
<CGS> 1,206
<TOTAL-COSTS> 1,206
<OTHER-EXPENSES> 4,973
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (3,761)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,761)
<EPS-PRIMARY> (1.31)
<EPS-DILUTED> (1.31)
</TABLE>
