<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 10, 1996.
REGISTRATION NO. 333-4560
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER THE
SECURITIES ACT OF 1933
------------------------
CARDIOVASCULAR DYNAMICS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE
(STATE OR OTHER JURISDICTION 3841 68-0328265
OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
------------------------
13900 ALTON PARKWAY, SUITE 122
IRVINE, CALIFORNIA 92718
(714) 457-9546
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF THE REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
MICHAEL R. HENSON
PRESIDENT AND CHIEF EXECUTIVE OFFICER
CARDIOVASCULAR DYNAMICS, INC.
13900 ALTON PARKWAY, SUITE 122
IRVINE, CALIFORNIA 92718
(714) 457-9546
(NAME AND ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
EDWARD M. LEONARD, ESQ. ALAN K. AUSTIN, ESQ.
BROBECK, PHLEGER & HARRISON LLP DAVID J. SEGRE, ESQ.
TWO EMBARCADERO PLACE WILSON, SONSINI, GOODRICH & ROSATI
2200 GENG ROAD PROFESSIONAL CORPORATION
PALO ALTO, CALIFORNIA 94303 650 PAGE MILL ROAD
(415) 424-0160 PALO ALTO, CALIFORNIA 94306
(415) 493-9300
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act"), check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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<PAGE> 2
CARDIOVASCULAR DYNAMICS, INC.
CROSS REFERENCE SHEET
PURSUANT TO ITEM 501(b) OF REGULATION S-K SHOWING LOCATION IN
PROSPECTUS OF PART I ITEMS OF FORM S-1
<TABLE>
<CAPTION>
ITEM NUMBER AND HEADING IN FORM S-1 REGISTRATION
STATEMENT LOCATION IN PROSPECTUS
--------------------------------------------------- ----------------------------------
<S> <C> <C>
1. Forepart of the Registration Statement and Outside
Front Cover Page of Prospectus..................... Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages of
Prospectus......................................... Inside Front Cover Page; Outside
Back Cover Page
3. Summary Information, Risk Factors and Ratio of
Earnings to Fixed Charges.......................... Prospectus Summary; Risk Factors;
The Company
4. Use of Proceeds.................................... Use of Proceeds
5. Determination of Offering Price.................... Underwriting
6. Dilution........................................... Dilution
7. Selling Security Holders........................... Inapplicable
8. Plan of Distribution............................... Outside and Inside Front Cover
Pages; Underwriting
9. Description of Securities to be Registered......... Description of Capital Stock
10. Interests of Named Experts and Counsel............. Legal Matters
11. Information with Respect to the Registrant......... Inside and Outside Front Cover
Pages; Prospectus Summary; Risk
Factors; The Company; Use of
Proceeds; Dividend Policy;
Capitalization; Dilution; Selected
Financial Data; Management's
Discussion and Analysis of
Financial Condition and Results of
Operations; Business; Management;
Certain Transactions; Principal
Stockholders; Description of
Capital Stock; Shares Eligible for
Future Sale; Financial Statements
12. Disclosure of Commission Position on
Indemnification for Securities Act Liabilities..... Inapplicable
</TABLE>
<PAGE> 3
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED JUNE 10, 1996
3,400,000 SHARES
LOGO
CARDIOVASCULAR DYNAMICS, INC.
COMMON STOCK
------------------------
All of the shares of Common Stock offered hereby are being offered by
CardioVascular Dynamics, Inc. ("CVD" or the "Company"). Prior to this offering,
there has been no public market for the Common Stock of the Company. It is
currently anticipated that the initial public offering price of the Common Stock
will be between $11.00 and $13.00 per share. See "Underwriting" for a discussion
of factors considered in determining the initial public offering price. Upon
completion of this offering, and assuming no exercise of the Underwriters'
over-allotment option, EndoSonics Corporation ("EndoSonics") will own
approximately 49% of the Company's outstanding Common Stock, and will be able to
effectively control those matters requiring stockholder approval. See "Certain
Transactions." The Company's Common Stock has been approved for quotation on the
Nasdaq National Market under the symbol "CCVD."
------------------------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" ON PAGES 6-13.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share................................ $ $ $
- -----------------------------------------------------------------------------------------------
Total(3)................................. $ $ $
</TABLE>
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(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting expenses, payable by the Company, estimated at $770,000.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
510,000 additional shares of Common Stock on the same terms and conditions
as set forth above solely to cover over-allotments, if any. If such option
is exercised in full, the total Price to Public, Underwriting Discounts and
Commissions and Proceeds to Company will be $ , $ and
$ , respectively. See "Underwriting."
------------------------
The shares of Common Stock are offered by the several Underwriters named
herein, subject to prior sale, when, as and if accepted by them and subject to
certain conditions. The Underwriters reserve the right to withdraw, cancel or
modify such offer and to reject orders in whole or in part. It is expected that
the certificates for the shares of Common Stock will be available for delivery
at the offices of Volpe, Welty & Company, One Maritime Plaza, San Francisco,
California, on or about , 1996.
VOLPE, WELTY & COMPANY
WESSELS, ARNOLD & HENDERSON
VECTOR SECURITIES INTERNATIONAL, INC.
The date of this Prospectus is , 1996
<PAGE> 4
[PICTURE]
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
Bullett is a registered trademark of CardioVascular Dynamics, Inc.
Trademark applications are pending for the CVD logo, FACT, CAT, ARC, FOCUS, LYNX
and Periflow. All other trademarks and trade names referred to in this
Prospectus are the property of their respective owners.
<PAGE> 5
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements and notes thereto appearing elsewhere in
this Prospectus. This Prospectus contains forward-looking statements that
involve risks and uncertainties. The Company's actual results may differ
materially from those described in the forward-looking statements. Investors
should carefully consider the information set forth under the heading "Risk
Factors" in addition to the other information contained in this Prospectus
before purchasing the Common Stock offered hereby. Except as set forth in the
financial statements or as otherwise specified herein, all information in this
Prospectus (i) assumes no exercise of the Underwriters' over-allotment option,
(ii) reflects the conversion of the convertible obligation and all of the
Company's outstanding shares of Preferred Stock into shares of Common Stock as a
consequence of the offering made hereby, and (iii) reflects a 2-for-1 split of
the Common Stock, effected May 2, 1996. See "Underwriting" and "Description of
Capital Stock."
THE COMPANY
CardioVascular Dynamics, Inc. ("CVD" or the "Company") designs, develops,
manufactures and markets catheters used to treat certain vascular diseases. The
Company's catheters are used in conjunction with angioplasty and other
interventional procedures such as vascular stenting and drug delivery. The
Company's proprietary FOCAL and Multiple Microporous Membrane ("M3")
technologies enable physicians to deliver therapeutic radial force, stents,
drugs or contrast media accurately and effectively to the treatment site, and
also allow the perfusion of blood during an interventional procedure. The
Company believes that the combination of these technologies on a
multiple-purpose catheter enables physicians to effectively perform challenging
interventional procedures, resulting in improved treatment outcomes and lower
costs. The Company has five issued and four allowed U.S. patents covering
certain aspects of its catheter technologies. Since commencing commercial sales
in 1994, the Company has sold more than 12,000 catheters.
Cardiovascular disease, the leading cause of death in the United States, is
caused principally by atherosclerosis. Atherosclerosis is a progressive and
degenerative vascular disease in which cholesterol and other fatty materials are
deposited on the walls of blood vessels, forming a build-up known as plaque.
Treatments for atherosclerosis include drug therapy and open-heart bypass
surgery. In addition, cardiologists are increasingly utilizing minimally
invasive catheter-based treatments such as balloon angioplasty, atherectomy and
laser angioplasty to treat atherosclerosis.
Although catheter-based interventional therapies are generally successful
in initially increasing blood flow, studies indicate that after a traditional
coronary balloon angioplasty up to 50% of treated patients experience restenosis
(generally defined as a 50% or greater reduction in the lumen, or interior,
diameter of the treated vessel at the lesion site). In addition, studies show
that 5% to 8% of elective coronary balloon angioplasty patients may experience
acute reclosure of the treated vessel. Acute reclosure is an increase in the
severity of the vessel closure accompanied by a reduction in blood flow within
the vessel as a consequence of the intervention which occurs within 24 hours of
the procedure. A study has also indicated that angioplasty of chronic total
occlusions represents 10% to 20% of all coronary angioplasty procedures. A
chronic total occlusion is a complete blockage of the vessel preventing blood
flow beyond the lesion site. The Company believes that these challenges are
inadequately addressed with existing, single function, uniform diameter
angioplasty balloons. However, while the Company believes that its products
address certain disadvantages of existing catheter technology, limitations
remain in the use of balloon angioplasty to treat atherosclerosis. The Company's
products may not be suitable for the treament of all forms of atherosclerosis.
For example, in many cases the existence of a total occlusion limits treatment
options to bypass surgery.
CVD has utilized its core proprietary technologies to develop catheters
that provide clinical and cost benefits in the treatment of vascular diseases.
The Company's catheters are designed to address three principal challenges
facing cardiologists: restenosis of a treated vessel, chronic total occlusions
and acute reclosure of a vessel during or soon after a procedure. The Company's
patented FOCAL technology combines compliant and non-compliant balloon materials
on a single catheter, creating an angioplasty balloon that has an adjustable,
larger center diameter with fixed, smaller diameters at each end. These
characteristics allow a single balloon to expand to multiple diameters, enabling
the physician to perform interventional procedures in vessels of varying
diameters and anatomical locations. The Company's proprietary M3 technology
combines multiple membranes of polymeric balloon material to form a single
balloon that enables the accurate delivery of drugs or contrast agents to the
lesion or thrombus site. The M3 technology can also be utilized to provide
perfusion of blood during an interventional procedure. The Company believes that
the FOCAL and M3 technologies may enable physicians to cost-effectively treat
vascular diseases by reducing the cost of those procedures which require more
than one catheter.
3
<PAGE> 6
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company................. 3,400,000 shares
Common Stock to be outstanding after the offering... 8,262,500 shares(1)
Use of proceeds..................................... Product development, capital
expenditures, clinical trials and
studies, working capital, direct sales
and marketing and repayment of amounts
owed to EndoSonics.
Nasdaq National Market symbol....................... CCVD
</TABLE>
RISK FACTORS
An investment in the Common Stock offered hereby is subject to numerous
risks. The Company has a history of operating losses, expects to continue to
incur operating losses and may require additional funding. In addition, the
Company has experienced and expects to continue to experience significant
fluctuations in quarterly operating results. The Company has limited sales to
date and there can be no assurance that the Company's products will achieve
market acceptance or that the Company's products will not be rendered obsolete
as a result of technological change. There can be no assurance that the
Company's intellectual property will provide competitive advantages or that the
Company's products do not infringe the intellectual property rights of others.
The Company's products compete with or will compete with products marketed by a
number of other manufacturers, many of whom have established market positions
and significantly greater resources than the Company. The Company has very
limited experience manufacturing its products and may experience difficulties in
manufacturing scale-up. The Company also has limited marketing and sales
resources and depends upon the marketing capabilities of certain strategic
partners for the distribution of its products. Products offered by the Company
are subject to approval by regulatory authorities and failure to obtain or
maintain such approvals may delay or prevent the introduction or marketing of
the Company's products. Investors should carefully consider the information set
forth under the heading "Risk Factors" in addition to the other information
contained in this Prospectus before purchasing the Common Stock offered hereby.
4
<PAGE> 7
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PERIOD FROM THREE MONTHS
MARCH 16, 1992 ENDED
(INCEPTION) TO YEAR ENDED DECEMBER 31, MARCH 31,
DECEMBER 31, ----------------------------- ----------------
1992(2) 1993(2) 1994 1995 1995 1996
-------------- ------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenue................... $ -- $ 126 $ 2,389 $ 4,103 $ 409 $2,033
Charge for acquired in-process
research and development(3)... -- (2,001) -- (488) -- --
Loss from operations............ (323) (2,878) (1,022) (2,976) (664) (404)
Net loss........................ $ (313) $(2,849) $ (971) $(2,874) $ (625) $ (377)
Pro forma net loss per
share(4)...................... $ (0.25) $ (0.65) $(0.14) $(0.08)
Shares used in computing pro
forma net loss per share(4)... 3,876 4,441 4,405 4,485
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1996
--------------------------
ACTUAL AS ADJUSTED(5)
------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash............................................................... $ 8,655 $ 45,829
Working capital.................................................... 6,748 43,922
Total assets....................................................... 11,770 48,944
Convertible obligation............................................. 750 --
Accumulated deficit................................................ (6,802) (6,802)
Total stockholders' equity......................................... 6,551 44,475
</TABLE>
- ---------------
(1) Based on shares outstanding at March 31, 1996. Includes the Common Stock to
be outstanding upon conversion of the convertible obligation at an assumed
initial public offering price of $12.00 (the "Convertible Obligation"). Does
not include 977,000 shares reserved for issuance under options outstanding
at March 31, 1996 at a weighted average price per share of $1.21, and
223,000 shares reserved for grant of future options under the Company's 1996
Stock Option/Stock Issuance Plan. Also excludes 80,000 common shares
issuable upon exercise of a warrant outstanding at March 31, 1996 at an
exercise price of $3.29 per share and 40,000 common shares issuable upon
exercise of a warrant issued subsequent to March 31, 1996 at an exercise
price of $3.29 per share. See Notes 2, 9 and 11 of Notes to Financial
Statements.
(2) The period from March 16, 1992 (inception) to December 31, 1992 and the
period from January 1, 1993 to June 9, 1993 reflect the operations of the
predecessor to the Company. See Note 1 of Notes to Financial Statements.
(3) The charge for acquired in-process research and development reflects a
change in the basis of the Company's assets and liabilities as a result of
the acquisition by EndoSonics which has been allocated to the Company. See
Note 1 of Notes to Financial Statements.
(4) See Note 1 of Notes to Financial Statements for information regarding the
calculation of pro forma net loss per share.
(5) Adjusted to give effect to the conversion of the Convertible Obligation and
the sale of 3,400,000 shares of Common Stock by the Company in the offering
made hereby at an assumed initial public offering price of $12.00 per share
and the application of the estimated net proceeds therefrom. See "Use of
Proceeds."
5
<PAGE> 8
RISK FACTORS
In evaluating the Company's business, prospective investors should consider
carefully the following risk factors in addition to the other information
presented in this Prospectus. This Prospectus contains forward-looking
statements that involve risks and uncertainties. The Company's actual results
may differ materially from those described in the forward-looking statements.
Investors should carefully consider the following risk factors in addition to
the other information contained in this Prospectus before purchasing the Common
Stock offered hereby.
History of Operating Losses; Anticipated Future Losses; Future Capital
Requirements. The Company was founded in 1992 and has experienced annual
operating losses since its inception. Its net loss in 1995 was $2.9 million. The
Company's accumulated deficit at March 31, 1996 was $6.8 million. The Company
expects to continue to incur operating losses through at least 1997 and there
can be no assurance that the Company will ever be able to achieve or sustain
profitability in the future. The Company expects to incur substantially
increased costs related to, among other things, clinical testing, product
development, manufacturing scale-up and sales and marketing activities. The
Company anticipates that its existing capital resources, including the net
proceeds from this offering and the interest earned thereon, will be sufficient
to fund its operations through 1997. The Company's future capital requirements
will depend on many factors, including its research and development programs,
the scope and results of clinical trials, the time and costs involved in
obtaining regulatory approvals, the costs involved in obtaining and enforcing
patents or any litigation by third parties regarding intellectual property, the
status of competitive products, the establishment and scale-up of manufacturing
capacity, the establishment of sales and marketing capabilities, the
establishment of collaborative relationships with other parties and costs
related to the acquisition of new technologies and product development. The
Company may require additional funds to finance these activities and for working
capital requirements. The Company may seek such funds through additional
financings, including private or public equity or debt offerings and
collaborative arrangements with corporate partners. There can be no assurance
that funds will be raised on favorable terms, if at all. If adequate funds are
not available, the Company may be required to delay, scale back or eliminate one
or more of its development programs or obtain funds through arrangements with
collaborative partners or others that may require the Company to relinquish
rights to certain technologies, product candidates or products that the Company
would not otherwise relinquish. See "Use of Proceeds" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Limited Sales to Date; Uncertainty of Market Acceptance. The Company's
catheters are used in conjunction with angioplasty and other intravascular
procedures such as vascular stenting and drug delivery. Although the Company has
received regulatory clearance for a total of thirty-two products, only eight of
such products have been marketed. Of those products which have been marketed,
many have been marketed only in limited quantities or in certain markets, or are
allowed to be marketed only in certain countries. In addition, while
interventional catheters are widely used technologies, the Company's catheter
designs are relatively new. The commercial success of the Company's products
will depend upon their acceptance by the medical community as useful,
cost-effective components of interventional cardiovascular and peripheral
vascular procedures, including the acceptance by the medical community of stents
and the availability and acceptance of therapeutic drugs for use in
interventional procedures. The Company currently relies upon relationships with
certain prominent doctors and researchers in the medical community to promote
the uses and acceptance of its approved products. There can be no assurance that
the Company will be able to maintain such relationships or establish additional
relationships in the future. The erosion or loss of any such relationship could
detrimentally affect the market acceptance of the Company's products. Failure of
the Company's products to achieve such market acceptance would have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business -- Products."
Dependence Upon New Products; Rapid Technological Change; Risk of
Obsolescence. The medical device industry generally, and the interventional
catheter market in particular, are characterized by rapid technological change,
changing customer needs, and frequent new product introductions. As a result,
the useful lives of both the technology and products for the treatment of
cardiovascular and peripheral vascular diseases are limited, in some instances
to as little as twelve months. The Company's future success will depend
6
<PAGE> 9
upon its ability to develop, manufacture and introduce new products that address
the needs of its customers. There can be no assurance that the Company will be
successful in developing and marketing new products that achieve market
acceptance or that the Company will not experience difficulties that could delay
or prevent the successful development, introduction and marketing of new
products. In addition, there can be no assurance that the Company's existing
products will not be rendered obsolete as a result of technological developments
or that the products that the Company has under development will not be rendered
obsolete prior to the introduction of such products. See "Business -- Products."
Fluctuations in Quarterly Operating Results. CVD's results of operations
have varied significantly from quarter to quarter. The Company has experienced
an operating loss for each of the last three years. Quarterly operating results
will depend upon several factors, including the timing and amount of expenses
associated with expanding the Company's operations, the conduct of clinical
trials and the timing of regulatory approvals, new product introductions both in
the United States and internationally, the mix between pilot production of new
products and full-scale manufacturing of existing products, the mix between
domestic and export sales, variations in foreign exchange rates, changes in
third-party payors' reimbursement policies and healthcare reform. The Company
does not operate with a significant backlog of customer orders, and therefore
revenues in any quarter are significantly dependent on orders received within
that quarter. In addition, the Company cannot predict ordering rates by
distributors, some of whom place infrequent stocking orders. The Company's
expenses are relatively fixed and difficult to adjust in response to fluctuating
revenues. As a result of these and other factors, the Company expects to
continue to experience significant fluctuations in quarterly operating results,
and there can be no assurance that the Company will be able to achieve or
maintain profitability in the future. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
Reliance on Patents and Proprietary Technology; Risk of Patent
Infringement. While the Company owns certain issued and allowed U.S. patents
and has additional U.S. and foreign patent applications pending, there can be no
assurance that the Company's patent applications will issue as patents or that
any issued patents will provide competitive advantages for the Company's
products or will not be successfully challenged or circumvented by its
competitors. The interventional cardiovascular market in general and the market
for balloon angioplasty catheters (including the type of catheters offered by
CVD) in particular has been characterized by substantial litigation regarding
patent and other intellectual property rights. There can be no assurance that
the Company's products do not infringe such patents or rights. In the event that
any such parties assert claims against the Company for patent infringement and
such patents are upheld as valid and enforceable, the Company could be prevented
from utilizing the subject matter claimed in such patents, or would be required
to obtain licenses from the owners of any such patents or redesign its products
or processes to avoid infringement. There can be no assurance that such licenses
would be available or, if available, would be so on terms acceptable to the
Company or that the Company would be successful in any attempt to redesign its
products or processes to avoid infringement. In addition, foreign intellectual
property laws may not provide protection commensurate with that provided by U.S.
intellectual property laws, and there can be no assurance that foreign
intellectual property laws will adequately protect the Company's intellectual
property rights abroad. The Company also relies on trade secrets and proprietary
technology and enters into confidentiality and non-disclosure agreements with
its employees, consultants and advisors. There can be no assurance that the
confidentiality of such trade secrets or proprietary information will be
maintained by employees, consultants, advisors or others, or that the Company's
trade secrets or proprietary technology will not otherwise become known or be
independently developed by competitors in such a manner that the Company has no
practical recourse. Litigation may be necessary to defend against claims of
infringement or invalidity, to enforce patents issued to the Company or to
protect trade secrets, and there can be no assurance that any such litigation
would be successful. Any litigation could result in substantial costs to, and
diversion of resources by, the Company and its officers, which could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business -- Patents and Proprietary Information."
Significant Competition. Competition in the market for devices used in the
treatment of cardiovascular and peripheral vascular disease is intense, and is
expected to increase. The interventional cardiology market is characterized by
rapid technological innovation and change, and the Company's products could be
rendered obsolete as a result of future innovations. The Company's catheters
compete or will compete with catheters
7
<PAGE> 10
marketed by a number of manufacturers, including Advanced Cardiovascular
Systems, Inc., a subsidiary of Guidant Corporation ("ACS"), SCIMED Life Systems,
Inc., a subsidiary of Boston Scientific Corporation ("SCIMED"), Johnson &
Johnson Interventional Systems ("JJIS") and Cordis Corporation, subsidiaries of
Johnson & Johnson, Medtronic, Inc., C.R. Bard, Inc. and Schneider USA, a
subsidiary of Pfizer, Inc. Such companies have significantly greater financial,
management and other resources, established market positions, and significantly
larger sales and marketing organizations than does the Company. The Company also
faces competition from manufacturers of other catheter-based devices, vascular
stents and pharmaceutical products intended to treat vascular disease. In
addition, the Company believes that many of the customers and potential
customers of the Company's products prefer to purchase catheter products from a
single source. Accordingly, many of the Company's competitors, because of their
size and range of product offerings, have a competitive advantage over the
Company. There can be no assurance that the Company's competitors will not
succeed in developing or marketing technologies or products that are more
clinically effective or cost effective than any that are being marketed or
developed by the Company, or that such competitors will not succeed in obtaining
regulatory approval for introducing or commercializing any such products prior
to the Company. See "Business -- Competition."
Limited Manufacturing Experience. The Company's success will depend in
part on its ability to manufacture its products in compliance with ISO 9001, the
FDA's Good Manufacturing Practices ("GMP") regulations, California Department of
Health Services ("CDHS") licensing and other regulatory requirements, in
sufficient quantities and on a timely basis, while maintaining product quality
and acceptable manufacturing costs. The Company began manufacturing certain of
its products at its facilities in July 1995. Accordingly, the Company has very
limited experience in manufacturing its products. In addition, the Company
currently intends to introduce a significant number of new products in 1996. The
Company has undergone and expects to continue to undergo regular GMP inspections
in connection with the manufacture of its products at the Company's facilities.
The Company's success will depend, among other things, on its ability to
efficiently manage the simultaneous manufacture of different products and to
integrate the manufacture of new products with existing products. There can be
no assurance that the Company will not encounter difficulties in scaling up
production of new products, including problems involving production yields,
quality control and assurance, component supply and shortages of qualified
personnel. The Company's failure to successfully commence the manufacturing of
these new products, or to increase production volumes of new or existing
products in a timely manner, would materially adversely affect the Company's
business, financial condition and results of operations. Failure to increase
production volumes in a timely or cost-effective manner or to achieve or
maintain compliance with ISO 9001, GMP regulations, CDHS licensing or other
regulatory requirements could have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company purchases many standard and custom built components from
independent suppliers and subcontracts certain manufacturing processes from
independent vendors. Most of these components and processes are available from
more than one vendor. However, certain manufacturing processes are currently
performed by single vendors. An interruption of performance by any of these
vendors could have a material adverse effect on the Company's ability to
manufacture its products until a new source of supply was qualified and, as a
result, could have an adverse effect on the Company's business, financial
condition and results of operations. See "Business -- Manufacturing" and
"Business -- Government Regulation."
Potential Inability to Manage Growth. The Company has historically relied
on EndoSonics to perform certain activities on its behalf, including
manufacturing, financial, regulatory and administrative functions. Since July
1995, CVD has conducted its manufacturing operations at its facilities in Irvine
and also currently performs the financial, regulatory and administrative
functions previously performed by EndoSonics. Accordingly, the Company has
experienced a period of significant expansion of its operations that has placed
a significant strain upon its management systems and resources. The Company has
recently implemented a number of new financial and management controls,
reporting systems and procedures. In addition, the Company has recently hired a
significant number of employees and plans to further increase its total
headcount. The Company also plans to expand the geographic scope of its customer
base and operations. This expansion has resulted and will continue to result in
substantial demands on the Company's management
8
<PAGE> 11
resources. The Company's ability to manage future expansion of its operations
will require the Company to continue to improve its financial and management
controls, reporting systems and procedures on a timely basis and to expand,
train and manage its employee work force. There can be no assurance that the
Company will be able to do so successfully. The failure to do so would have a
material adverse effect on the Company's business, financial condition and
results of operations.
Limited Marketing and Sales Resources; Dependence Upon Strategic
Partners. CVD intends to rely primarily on certain strategic relationships,
medical device distributors and its direct sales organization to distribute its
products. The Company's ability to distribute its products successfully depends
in part on the marketing capabilities of its strategic partners. In recent years
there has been significant consolidation among medical device suppliers as the
major suppliers have attempted to broaden their product lines in order to
respond to cost pressures from health care providers. This consolidation has
made it increasingly difficult for smaller suppliers, such as the Company, to
effectively distribute their products without a relationship with one or more of
the major suppliers. The Company is currently marketing certain of its products
through licensing agreements with SCIMED and ACS. In addition, Fukuda Denshi
Company, Ltd. ("Fukuda") is the Company's exclusive distributor in Japan for
certain of the Company's products. Fukuda is also responsible for obtaining
regulatory approval for the Company's products in Japan. The Company's revenue
from these relationships is dependent upon the efforts made by such parties and
there can be no assurance that such efforts will be successful. There can be no
assurance that the Company will be able to maintain or expand its relationships
with its strategic partners or to replace its strategic partners in the event
any such relationship were terminated. In the event of such a termination, the
Company's ability to distribute its products would be materially adversely
affected, which would have a material adverse effect on the Company's business,
financial condition and results of operations.
CVD currently has a limited marketing and sales staff. The Company intends
to expand its direct sales force to market the Company's products, and intends
to use a portion of the net proceeds from this offering to fund this expansion.
However, there can be no assurance that CVD will successfully expand its direct
sales and marketing organization, or that if expanded, such organization will be
able to effectively distribute CVD's products. If CVD is unable to achieve
distribution of its products through its direct sales organization, the
Company's business, financial condition and results of operations would be
materially adversely affected.
The Company also has product development relationships with SCIMED and ACS.
SCIMED currently funds certain research and development efforts undertaken by
CVD in the area of combined drug delivery and coronary angioplasty. ACS conducts
development work on the Company's perfusion technology. If CVD is unable to
maintain its relationships with these or future strategic partners its product
development efforts could be materially adversely affected, which would
materially adversely affect the Company's business, financial condition and
results of operations. See "Business -- Marketing and Sales" and
"Business -- Strategic Relationships."
Government Regulation. The manufacturing and marketing of the Company's
products are subject to extensive and rigorous government regulation in the
United States and in other countries. The Company believes that its success will
be significantly dependent upon commercial sales of improved versions of its
catheter products. The Company will not be able to market these new products in
the United States unless and until the Company obtains approval or clearance
from the FDA. Foreign and domestic regulatory approvals, if granted, may include
significant limitations on the indicated uses for which a product may be
marketed.
If a medical device manufacturer can establish that a newly developed
device is "substantially equivalent" to a legally marketed Class I or Class II
device, or to a Class III device that the FDA has not called for a premarket
approval ("PMA"), the manufacturer may seek clearance from the FDA to market the
device by filing a premarket notification with the FDA under Section 510(k) of
the Federal Food, Drug, and Cosmetic Act ("510(k)"). All of the 510(k)
clearances received for the Company's catheters were based on substantial
equivalence to legally marketed devices. There can be no assurance that 510(k)
clearance for any future product or significant modification of an existing
product will be granted or that the process will not be unduly lengthy. In
addition, if the FDA has concerns about the safety or effectiveness of any of
the Company's products, it could act to withdraw approval or clearances of those
products or request that the Company
9
<PAGE> 12
present additional data. Any such actions would have a material adverse effect
on the Company's business, financial condition and results of operations.
If substantial equivalence cannot be established, or if the FDA determines
that the device or the particular application for the device requires a more
rigorous review to assure safety and effectiveness, the FDA will require that
the manufacturer submit a PMA application that must be reviewed and approved by
the FDA prior to sales and marketing of the device in the United States. The PMA
process is significantly more complex, expensive and time consuming than the
510(k) clearance process and always requires the submission of clinical data. It
is expected that certain of the Company's products under development will be
subject to this PMA process. The Company currently has a non-exclusive,
royalty-free right to submit PMA supplement applications utilizing an EndoSonics
PMA as a reference and to manufacture and distribute CVD products as a
supplement to the EndoSonics PMA. This agreement may be terminated in the event
of breach upon 60 days notice by the non-breaching party, subject to the
breaching party's right to cure. In the event of termination, the Company would
be prohibited from submitting new PMA supplements referencing the EndoSonics PMA
and would be required to seek independent FDA approval for any such products,
which would have a material adverse effect on the Company's business, financial
condition and results of operations.
The Company is also required to register as a medical device manufacturer
with the FDA and maintain a license with certain state agencies, such as the
CDHS. As such, the Company is inspected on a routine basis by both the FDA and
the CDHS for compliance with GMP regulations. These regulations require that the
Company manufacture its products and maintain related documentation in a
prescribed manner with respect to manufacturing, testing and control activities.
The Company has also undergone and expects to continue to undergo regular GMP
inspections in connection with the manufacture of its products at the Company's
facilities. Further, the Company is required to comply with various FDA
requirements for labeling. The Medical Device Reporting laws and regulations
require that the Company provide information to the FDA on deaths or serious
injuries alleged to have been associated with the use of its devices, as well as
product malfunctions that would likely cause or contribute to death or serious
injury if the malfunction were to recur. In addition, the FDA prohibits an
approved device from being marketed for unapproved applications. CVD has
received FDA approval to market the FACT catheters, which utilize the FOCAL
technology, for coronary balloon angioplasty. These catheters are marketed
outside the United States for use in stent deployment. However, without specific
FDA approval for stent deployment, these catheters may not be marketed by the
Company in the United States for such use.
Failure to comply with applicable regulatory requirements can, among other
consequences, result in fines, injunctions, civil penalties, suspensions or loss
of regulatory approvals, product recalls, seizure of products, operating
restrictions and criminal prosecution. In addition, government regulations may
be established in the future that could prevent or delay regulatory clearance or
approval of the Company's products. Delays in receipt of clearances or
approvals, failure to receive clearances or approvals or the loss of previously
received clearances or approvals would have a material adverse effect on the
Company's business, financial condition and results of operations.
The Company is also subject to other federal, state and local laws,
regulations and recommendations relating to safe working conditions, laboratory
and manufacturing practices. The extent of government regulation that might
result from any future legislation or administrative action cannot be accurately
predicted. Failure to comply with regulatory requirements could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business -- Products" and "Business -- Government Regulation."
International sales of the Company's products are subject to the
registration requirements of each country. The regulatory review process varies
from country to country and may in some cases require the submission of clinical
data. The Company typically relies on its distributors in such foreign countries
to obtain the requisite regulatory approvals. There can be no assurance,
however, that such approvals will be obtained on a timely basis or at all. In
addition, the FDA must approve the export to certain countries of devices that
require a PMA but are not yet approved domestically.
10
<PAGE> 13
The Company is in the process of implementing policies and procedures which
are intended to allow the Company to receive ISO 9001 certification of its
quality system. The ISO 9000 series of standards for quality operations has been
developed to ensure that companies know the standards of quality to which they
must adhere to receive certification. The European Union has promulgated rules
which require that medical products receive by mid-1998 the right to affix the
CE mark, an international symbol of adherence to quality assurance standards and
compliance with applicable European medical device directives. ISO 9001
certification is one of the CE mark certification requirements. Failure to
receive the right to affix the CE mark will prevent the Company from selling its
products in member countries of the European Union. While the Company is in the
process of becoming ISO 9001 certified, there can be no assurance that the
Company will be successful in meeting these or any other certification
requirements on a timely basis, or at all.
Limitations on Third-Party Reimbursement. In the United States, the
Company's products are purchased primarily by medical institutions, which then
bill various third-party payors, such as Medicare, Medicaid, and other
government programs and private insurance plans, for the health care services
provided to patients. Government agencies, private insurers and other payors
determine whether to provide coverage for a particular procedure and reimburse
hospitals for medical treatment at a fixed rate based on the diagnosis-related
group ("DRG") established by the U.S. Health Care Financing Administration
("HCFA"). The fixed rate of reimbursement is based on the procedure performed,
and is unrelated to the specific devices used in that procedure. If a procedure
is not covered by a DRG, payors may deny reimbursement. In addition, some payors
may deny reimbursement if they determine that the device used in a treatment was
unnecessary, inappropriate or not cost-effective, experimental or used for a
non-approved indication. Reimbursement of interventional procedures utilizing
the Company's products is currently covered under a DRG. There can be no
assurance that reimbursement for such procedures will continue to be available,
or that future reimbursement policies of payors will not adversely affect the
Company's ability to sell its products on a profitable basis. In addition,
reimbursement may be denied if the product use is not in accordance with
approved FDA labeling. Failure by hospitals and other users of the Company's
products to obtain reimbursement from third-party payors, or changes in
government and private third-party payors' policies toward reimbursement for
procedures employing the Company's products, would have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Business -- Third-Party Reimbursement."
Dependence Upon International Sales. The Company derives, and expects to
continue to derive, a significant portion of its revenue from international
sales. In 1995 and the three months ended March 31, 1996, the Company's
international sales were $2.1 million and $1.1 million, respectively, or 59% and
64%, respectively, of product sales. The Company expects to continue to derive
significant revenue from international sales and therefore a significant portion
of the Company's revenues will continue to be subject to the risks associated
with international sales, including economic or political instability, shipping
delays, changes in applicable regulatory policies, inadequate protection of
intellectual property, fluctuations in foreign currency exchange rates and
various trade restrictions, all of which could have a significant impact on the
Company's ability to deliver products on a competitive and timely basis. Future
imposition of, or significant increases in the level of, customs duties, import
quotas or other trade restrictions, could have an adverse effect on the
Company's business, financial condition and results of operation. In foreign
countries, the Company's products are subject to governmental review and
certification. The regulation of medical devices, particularly in the European
Union, continues to expand and there can be no assurance that new laws or
regulations will not have an adverse effect on the Company's business, financial
condition and results of operations. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
Control by Existing Stockholder; Limitations on Pooling-of-Interests
Accounting in Merger Transactions. After this offering, EndoSonics will own
approximately 49% of the Company's outstanding Common Stock. EndoSonics will be
able to elect at least two members to the Company's five person board of
directors and will have the ability to effectively control the Company and
influence its affairs and the conduct of its business. Such concentration of
ownership may have the effect of delaying, deferring or preventing a change in
control of the Company. In accordance with applicable accounting standards, the
Company would be prohibited from accounting for a merger transaction, of or by
the Company, as a pooling-of-interests for a period of two years following the
date on which EndoSonics controls less than 50% of the outstanding voting Common
Stock of
11
<PAGE> 14
the Company. As a result, any business combination consummated during such
period would have to be accounted for using the purchase method. Under the
purchase method, the excess of the purchase price over the net book value of the
assets acquired would be amortized to expense, which could result in a
significant negative impact on the acquiror's results of operations and,
therefore, reduce the attractiveness of, or the price paid in, a particular
acquisition transaction.
EndoSonics has informed the Company that EndoSonics presently intends to
distribute or otherwise transfer to EndoSonics stockholders a portion of the CVD
shares it will hold on consummation of this offering. While EndoSonics indicated
that it may so distribute or transfer up to a majority of the shares it will
hold, it also indicated that the precise amount and timing of any such
distribution or transfer will depend upon, among other matters, an analysis of
the tax consequences to EndoSonics and its stockholders. Any such distribution
or transfer may result in a change of control of CVD. Notwithstanding
EndoSonics' stated intent, EndoSonics is not obligated to make any such
distribution or transfer nor is it obligated to take any action or refrain from
taking any action with respect to the shares of CVD which it will hold upon
completion of this offering. See "Certain Transactions."
Dependence Upon Key Personnel. The Company depends to a significant extent
upon key management and technical personnel. The Company's growth and future
success will depend in large part upon its ability to hire, motivate and retain
highly qualified personnel. Competition for such personnel is intense and there
can be no assurance that the Company will be successful in hiring, motivating or
retaining such qualified personnel. The loss of key personnel or the inability
to hire or retain qualified personnel could have a material adverse effect on
the Company's business, financial condition and results of operations. See
"Business -- Marketing and Sales," "Business -- Employees" and "Management."
Potential Product Liability; Limited Insurance. The Company faces the risk
of financial exposure to product liability claims. The Company's products are
often used in situations in which there is a high risk of serious injury or
death. Such risks will exist even with respect to those products that have
received, or in the future may receive, regulatory approval for commercial sale.
The Company is currently covered under EndoSonics' product liability insurance
policy with coverage limits of $2.0 million per occurrence and $2.0 million per
year in the aggregate. However, this coverage will terminate when the Company
ceases to be a majority-owned subsidiary of EndoSonics. Accordingly, following
this offering, the Company expects to obtain product liability insurance with
similar coverage limits. There can be no assurance that the Company's product
liability insurance is adequate or that such insurance coverage will remain
available at acceptable costs. There can be no assurance that the Company will
not incur significant product liability claims in the future. A successful claim
brought against the Company in excess of its insurance coverage could have a
material adverse effect on the Company's business, financial condition and
results of operations. Additionally, adverse product liability actions could
negatively affect the reputation and sales of the Company's products and the
Company's ability to obtain and maintain regulatory approval for its products
and substantially divert the time and effort of management away from the
Company's operations.
No Prior Public Market; Possible Volatility of Stock Price. Prior to this
offering, there has been no public market for the Common Stock, and there can be
no assurance that an active trading market will develop or be sustained. The
initial public offering price will be determined by negotiation between the
Company and the Representatives of the Underwriters based upon several factors,
and may not be indicative of the market price of the Common Stock after this
offering. The trading price of the Common Stock could also be subject to
significant fluctuations in response to variations in quarterly results of
operations, any future litigation involving the Company, announcements of
technological innovations or new products by the Company or its competitors,
governmental regulatory action, other developments or disputes with respect to
proprietary rights, general trends in the industry and overall market
conditions, and other factors. See "Underwriting."
Shares Eligible for Future Sale; Potential Adverse Effect on Market
Price. Sales of Common Stock in the public market after this offering could
adversely affect the market price of the Common Stock. The 3,400,000 shares sold
in this offering will be freely tradable without restriction. Beginning 180 days
following
12
<PAGE> 15
the date of this offering (or earlier with the consent of Volpe, Welty &
Company), approximately 4,000,000 shares will be eligible for sale, representing
3,240,000 shares held by EndoSonics and 760,000 shares held by SCIMED. Sales of
any such shares in the public market after this offering could adversely affect
the market price of the Common Stock. The Company also intends to register
approximately 1,200,000 shares of Common Stock reserved for issuance under the
Company's 1996 Stock Option/Stock Issuance Plan and 200,000 shares under the
Company's Employee Stock Purchase Plan as soon as practicable following the date
of this Prospectus. As of March 31, 1996, there were outstanding options under
the Company's stock option plans to acquire 977,000 shares, all of which are
subject to 180-day lock-up agreements with the Underwriters. After the
expiration of the 180-day lock-up period, SCIMED will be entitled to certain
demand and piggyback registration rights with respect to its shares. If SCIMED,
by exercising its demand registration rights, causes a large number of shares to
be registered and sold in the public market, such sales could have an adverse
effect on the market price for the Common Stock. If the Company were required to
include in a Company-initiated registration shares held by SCIMED pursuant to
the exercise of its piggyback registration rights, such sales may have an
adverse effect on the Company's ability to raise needed capital. See "Shares
Eligible for Future Sale."
Effect of Certain Charter Provisions; Anti-takeover Effects of Certificate
of Incorporation, Bylaws and Delaware Law. The Company's Board of Directors has
the authority to issue up to 5,000,000 shares of Preferred Stock and to
determine the price, rights, preferences, privileges and restrictions, including
voting rights, of those shares without any further vote or action by the
stockholders. The rights of the holders of Common Stock will be subject to, and
may be adversely affected by, the rights of the holders of any Preferred Stock
that may be issued in the future. The issuance of Preferred Stock could have the
effect of making it more difficult for a third party to acquire a majority of
the outstanding voting stock of the Company. In addition, the Company is subject
to the anti-takeover provisions of Section 203 of the Delaware General
Corporation Law, which will prohibit the Company from engaging in a "business
combination" with an "interested stockholder" for a period of three years after
the date of the transaction in which the person became an interested
stockholder, unless the business combination is approved in a prescribed manner.
The application of Section 203 also could have the effect of delaying or
preventing a change of control of the Company. Further, certain provisions of
the Company's Certificate of Incorporation and Bylaws and of Delaware law could
delay or make more difficult a merger, tender offer or proxy contest involving
the Company, which could adversely affect the market price of the Company's
Common Stock. See "Description of Capital Stock."
Absence of Dividends; Dilution. The Company has never paid any cash
dividends on the Common Stock and does not anticipate paying any cash dividends
on the Common Stock in the foreseeable future. Purchasers of the Common Stock
offered hereby will incur immediate substantial dilution in the net tangible
book value per share of Common Stock. See "Dividend Policy" and "Dilution."
13
<PAGE> 16
THE COMPANY
The Company was originally incorporated in California in March 1992 and
became a Delaware corporation in June 1993 after being acquired by EndoSonics.
The Company's principal executive offices are located at 13900 Alton Parkway,
Suite 122, Irvine, California 92718 and its telephone number is (714) 457-9546.
USE OF PROCEEDS
The net proceeds from the sale of the 3,400,000 shares of Common Stock
offered hereby at an assumed initial public offering price of $12.00 per share
are estimated to be $37,174,000 ($42,866,000 if the Underwriters' over-allotment
option is exercised in full) after deducting underwriting discounts and
commissions and estimated offering expenses payable by the Company.
The Company anticipates that approximately $12 million of the net proceeds
will be used in continuing product development and that approximately $5 million
will be used for capital expenditures. The Company also intends to pay the $2.6
million payable to EndoSonics from the net proceeds of this offering. A portion
of the net proceeds will be used to fund the expansion of the Company's sales
and marketing capabilities and the balance will be used for working capital and
other general corporate purposes. The Company may also spend a portion of the
proceeds to license or acquire products or technologies complementary to its
business and to conduct additional research and development programs. Pending
such uses, the Company intends to invest the net proceeds in short-term,
interest-bearing, investment grade securities.
The exact allocation of the proceeds for the purposes set forth above and
timing of the expenditures may vary significantly depending upon numerous
factors, including research and development programs, the scope and results of
clinical trials, the time and costs involved in obtaining regulatory approvals,
the costs involved in obtaining and enforcing patents or any litigation by third
parties regarding intellectual property, the status of competitive products, the
establishment of manufacturing capacity or third-party manufacturing
arrangements, the establishment of sales and marketing capabilities, the
establishment of collaborative relationships with other parties, and the costs
of manufacturing scale-up. There can be no assurance that the proceeds of this
offering, after deducting cash used in the Company's operations will be adequate
to fund these activities. If adequate funds are not available, the Company may
be required to delay, scale back or eliminate one or more of its development
programs or obtain funds through arrangements with collaborative partners or
others that may require the Company to relinquish rights to certain
technologies, product candidates or products that the Company would not
otherwise relinquish.
The Company anticipates that its existing capital resources, including the
net proceeds of this offering and the interest earned thereon will be sufficient
to fund its operations through 1997. However, there can be no assurance that the
Company will not be required to seek additional financing sooner or that such
financing, if required, will be available on terms satisfactory to the Company.
See "Risk Factors -- History of Operating Losses; Anticipated Future Losses;
Future Capital Requirements" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
DIVIDEND POLICY
The Company has not paid dividends since its inception. The Company
currently intends to retain all earnings, if any, for use in the expansion of
its business and therefore does not anticipate paying any dividends in the
foreseeable future.
14
<PAGE> 17
CAPITALIZATION
The following table sets forth the actual capitalization of the Company as
of March 31, 1996 and the capitalization as adjusted to reflect the receipt of
the estimated net proceeds from the sale of 3,400,000 shares of Common Stock at
an assumed initial public offering price of $12.00 pursuant to this offering and
the conversion of all outstanding shares of Preferred Stock into Common Stock
upon the closing of this offering:
<TABLE>
<CAPTION>
MARCH 31, 1996
-------------------------
ACTUAL AS ADJUSTED
--------- -----------
<S> <C> <C>
(IN THOUSANDS)
Convertible obligation................................................ $ 750 $ --
Stockholders' equity:
Preferred Stock: $.001 par value, 7,560,000 shares authorized
actual;
5,000,000 authorized as adjusted; 2,400,000 shares issued and
outstanding actual; none issued and outstanding as adjusted...... 2 --
Common Stock: $.001 par value, 30,000,000 shares authorized;
no shares issued and outstanding actual; 8,262,500 shares
issued and outstanding as adjusted(1)............................ -- 8
Additional paid-in capital.......................................... 13,720 51,638
Deferred compensation............................................... (369) (369)
Accumulated deficit................................................. (6,802) (6,802)
---- ----
Total stockholders' equity....................................... 6,551 44,475
---- ----
Total capitalization........................................... $ 7,301 $44,475
==== ====
</TABLE>
- ---------------
(1) Includes the Common Stock to be outstanding upon conversion of the
Convertible Obligation. Excludes 977,000 shares of Common Stock issuable
upon exercise of stock options outstanding as of March 31, 1996 at a
weighted average exercise price of $1.21 per share, 223,000 shares of Common
Stock reserved for grant of future options under the Company's 1996 Stock
Option/Stock Issuance Plan. Also excludes 80,000 shares of Common Stock
issuable upon exercise of a warrant outstanding as of March 31, 1996 at an
exercise price of $3.29 per share and 40,000 common shares issuable upon
exercise of a warrant issued subsequent to March 31, 1996 at an exercise
price of $3.29 per share. See "Management -- 1996 Stock Option/Stock
Issuance Plan," and Notes 2, 9 and 11 of Notes to Financial Statements.
15
<PAGE> 18
DILUTION
The net tangible book value of the Company's Common Stock as of March 31,
1996 was $6,551,000, or approximately $1.35 per share. Net tangible book value
per share represents the amount of the Company's stockholders' equity, less
intangible assets, divided by 4,862,500 shares of Common Stock outstanding after
giving effect to the conversion of the Convertible Obligation and all
outstanding shares of Preferred Stock into Common Stock upon completion of this
offering. After giving effect to the sale of 3,400,000 shares of Common Stock in
this offering at an assumed initial public offering price of $12.00 and the
application of the estimated net proceeds therefrom, the net tangible book value
of the Company as of March 31, 1996 would have been $44,475,000 or $5.38 per
share. This represents an immediate increase in net tangible book value of $3.97
per share to existing stockholders and an immediate dilution in net tangible
book value of $6.67 per share to purchasers of Common Stock in this offering.
Investors participating in this offering will incur immediate, substantial
dilution. This is illustrated in the following table:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.................... $12.00
Net tangible book value per share as of March 31, 1996........... $ 1.35
Increase per share attributable to new investors................. 4.03
-----
Net tangible book value per share after the offering............... 5.38
------
Dilution per share to new investors................................ $ 6.62
======
</TABLE>
As of March 31, 1996, there were options outstanding to purchase a total of
977,000 shares of Common Stock at a weighted average exercise price of $1.21 per
share under the Company's 1995 Stock Option Plan and a warrant outstanding to
purchase a total of 80,000 shares of Common Stock at an exercise price of $3.29
per share. Subsequent to March 31, 1996 the Company issued an additional warrant
to purchase a total of 40,000 shares of Common Stock at an exercise price of
$3.29 per share. To the extent outstanding options and warrants are exercised,
there will be further dilution to new investors.
The following table sets forth as of March 31, 1996, after giving effect to
the conversion of the Convertible Obligation and all outstanding shares of
Preferred Stock into Common Stock upon the closing of this offering, the
difference between the number of shares of Common Stock purchased from the
Company, the total consideration paid and the average price per share paid by
existing stockholders and by the new investors purchasing shares in this
offering at an assumed initial public offering price of $12.00 per share and
before deducting underwriting discounts and estimated offering expenses payable
by the Company:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
--------------------- ----------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders......... 4,862,500 58.8% $11,250,000 21.9% $ 2.31
New stockholders.............. 3,400,000 41.2 40,800,000 78.1 12.00
--------- ----- ----------- -----
Total....................... 8,262,500 100.0% $51,300,000 100.0%
========= ===== =========== =====
</TABLE>
16
<PAGE> 19
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
the Company's Financial Statements and Notes thereto and with Management's
Discussion and Analysis of Financial Condition and Results of Operations, which
are included elsewhere in this Prospectus. The statement of operations data for
the years ended December 31, 1993, 1994 and 1995, and the balance sheet data at
December 31, 1994 and 1995, are derived from the financial statements which have
been audited by Ernst & Young LLP, independent auditors, included elsewhere in
this Prospectus. The balance sheet data at December 31, 1992 and 1993 and the
statement of operations data for the period from March 16, 1992 (inception) to
December 31, 1992 are derived from audited financial statements not included in
this Prospectus. The statement of operations data for the three month periods
ended March 31, 1995 and 1996, and the balance sheet data at March 31, 1996 are
derived from unaudited financial statements included elsewhere in this
Prospectus and include, in the opinion of the Company, all adjustments
consisting of only normal recurring adjustments necessary for a fair
presentation of the Company's results of operations for those periods and
financial position at that date. The Company has not paid dividends since its
inception. The results for the three month period ended March 31, 1996 are not
necessarily indicative of the results to be obtained in any future period.
<TABLE>
<CAPTION>
PERIOD FROM
MARCH 16,
1992
(DATE OF THREE MONTHS
INCEPTION) ENDED
TO YEAR ENDED DECEMBER 31, MARCH 31,
DECEMBER 31, ----------------------------- ----------------
1992(1) 1993(1) 1994 1995 1995 1996
------------ ------- ------- ------- ------ ------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Sales............................................... $ -- $ 126 $ 1,169 $ 3,462 $ 199 $1,783
License fee and other from related party............ -- -- 1,220 641 210 100
Contract............................................ -- -- -- -- -- 150
------ ------- ------- ------- ------ ------
Total revenue......................................... -- 126 2,389 4,103 409 2,033
Costs and expenses:
Cost of sales....................................... -- 79 848 2,051 118 942
Charge for acquired in-process research and
development(2).................................... -- 2,001 -- 488 -- --
Research and development............................ 294 734 1,228 1,683 432 627
Marketing and sales................................. -- 94 748 1,526 255 577
General and administrative.......................... 29 96 587 1,331 268 291
------ ------- ------- ------- ------ ------
Total operating costs and expenses.................... 323 3,004 3,411 7,079 1,073 2,437
------ ------- ------- ------- ------ ------
Loss from operations.................................. (323) (2,878) (1,022) (2,976) (664) (404)
Other income.......................................... 10 29 51 102 39 27
------ ------- ------- ------- ------ ------
Net loss.............................................. $ (313) $(2,849) $ (971) $(2,874) $ (625) $ (377)
============ ======== ======== ======== ====== ======
Pro forma net loss per share(3)....................... $ (0.25) $ (0.65) $(0.14) $(0.08)
======== ======== ====== ======
Shares used in computing pro forma net loss per
share(3)............................................ 3,876 4,441 4,405 4,485
======== ======== ====== ======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------- MARCH 31,
1992 1993 1994 1995 1996
------- ------- ------- ------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash............................................... $ 650 $ 547 $ 3,379 $ 1,568 $ 8,655
Working capital (deficit).......................... 583 (75) 1,366 (774) 6,748
Total assets....................................... 678 690 4,340 4,002 11,770
Convertible obligation............................. -- -- -- 750 750
Accumulated deficit................................ (313) (2,580) (3,551) (6,425) (6,802)
Total stockholders' equity (net capital
deficiency)...................................... 607 (241) 1,288 (1,098) 6,551
</TABLE>
- ---------------
(1) The period from March 16, 1992 (inception) to December 31, 1992 and the
period from January 1, 1993 to June 9, 1993 reflect the operations of the
predecessor to the Company. See Note 1 of Notes to Financial Statements.
(2) The charge for acquired in-process research and development reflects a
change in the basis of the Company's assets and liabilities as a result of
the acquisition by EndoSonics which has been allocated to the Company. See
Note 1 of Notes to Financial Statements.
(3) See Note 1 of Notes to Financial Statements for information regarding the
calculation of pro forma net loss per share.
17
<PAGE> 20
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Prospectus contains certain forward-looking statements. The Company's
actual results may differ materially from those described in the forward-looking
statements. Investors should carefully consider the information set forth under
the heading "Risk Factors" in addition to the other information contained in
this Prospectus before purchasing the Common Stock offered hereby.
OVERVIEW
CVD designs, develops, manufactures and markets catheters used to treat
certain vascular diseases. The Company's patented catheters utilize its FOCAL
and M3 technologies to deliver therapeutic radial pressure, stents, drugs or
contrast media and improved blood flow during angioplasty and stent placement
procedures. To date, the majority of the Company's revenue has been derived from
sales of its angioplasty and angioplasty-related catheters.
From inception (March 16, 1992) through the first quarter of 1994, the
Company operations were limited and consisted primarily of research and
development and other start-up activities. On June 15, 1992, EndoSonics acquired
a 40% interest in CVD in exchange for $0.5 million in cash. Pursuant to an
Agreement and Plan of Reorganization between EndoSonics and CVD signed on June
9, 1993, EndoSonics acquired all of the outstanding capital stock of CVD in
exchange for $0.3 million in cash and 250,000 shares of EndoSonics' Common Stock
with an aggregate market value of $1.6 million. The acquisition by EndoSonics
resulted in a new basis for CVD's assets and liabilities. Accordingly, the
purchase price paid by EndoSonics has been allocated to CVD's identifiable
assets and liabilities, including $2.0 million to acquired in-process research
and development, which was immediately expensed, as no CVD products had received
regulatory approval and the technology did not have alternative future uses.
Pursuant to the terms of the Agreement and Plan of Reorganization, in June 1995,
EndoSonics became obligated to issue 50,000 shares of its Common Stock with an
aggregate market value of $0.5 million, to the former shareholders of CVD
because the market price of EndoSonics' stock did not exceed a specified price
for a specified period during the two-year period following the acquisition. The
fair value of such shares was charged to acquired in-process technology. In
addition, EndoSonics recently purchased 400,000 shares of CVD's Series B
Preferred Stock for a purchase price of $8.0 million, which will convert into
800,000 shares of Common Stock upon the consummation of this offering. See
"Certain Transactions -- Relationship with EndoSonics Corporation."
In September 1994, CVD and SCIMED entered into a Stock Purchase and
Technology License Agreement to develop and license CVD's patented combination
balloon angioplasty/site-specific drug delivery technology (the Transport
product line) for use in the coronary vessels. Through March 31, 1996 the
Company had received in the aggregate approximately $2.0 million in license
fees, research and development funding and technical assistance from SCIMED
under this agreement. SCIMED also purchased a 19% equity position in the Company
for a purchase price of $2.5 million. See "Business -- Strategic Relationships."
In January 1995, the Company and ACS entered into an agreement pursuant to
which the Company acquired certain rights to ACS' SmartNeedle Technology,
subject to the payment of certain royalties. The parties subsequently confirmed
their understanding with respect to certain matters in a second agreement dated
March 4, 1996 (collectively, the "ACS Agreements"). Pursuant to the ACS
Agreements, ACS was granted the option to acquire the exclusive worldwide rights
to certain CVD perfusion technology, which ACS exercised on February 14, 1996.
In exchange for this perfusion technology, ACS is obligated to make milestone
and minimum annual royalty payments to CVD, and also has certain obligations to
develop and market the perfusion technology. Through March 31, 1996 the Company
had received approximately $0.2 million in milestone payments under the ACS
Agreements. See "Business -- Strategic Relationships."
The Company currently sells its products through a combination of medical
device distributors and a limited number of direct sales personnel. The Company
is a party to three agreements for the U.S. distribution of products
incorporating its FOCAL and M3 technologies. CVD distributes certain products in
Japan through an exclusive distribution agreement with Fukuda. CVD also has
distribution agreements with 18 companies covering 35 countries outside the
United States and Japan. See "Business -- Strategic Relationships."
18
<PAGE> 21
Based on the Company's limited operations in 1993, the Company believes
that a year-to-year comparison of 1994 to 1993 is not meaningful and has not
included such a comparison in the discussion that follows.
RESULTS OF OPERATIONS
Years Ended December 31, 1994 and December 31, 1995
Sales Revenue. Sales revenue increased to $3.5 million in 1995 from $1.2
million in 1994, representing an increase of 196%. Sales revenue in 1994
resulted primarily from sales of the Company's Transport products, which were
subsequently licensed to SCIMED in 1995. The Company no longer receives sales
revenue for the Transport. Sales revenue in 1995 was due to sales of the
Company's CAT catheter, which was introduced in the first quarter of 1995, and
sales of the SmartNeedle vascular access products beginning in the second
quarter of 1995. Sales of products in Japan through the Company's exclusive
distribution relationship with Fukuda accounted for 18% of the Company's revenue
in 1995. In addition, sales to JJIS accounted for 12% of the Company's revenue
in 1995.
License Fee and Other Revenue from Related Party. License fee and other
revenue represents amounts earned under the aforementioned agreement with
SCIMED. The 1994 amount consists of a $1.0 million license fee and $0.2 million
of development and other revenue. The 1995 amount consists of $0.6 million of
development and other revenue. Future revenue under this agreement will be
derived primarily from royalties earned on SCIMED's sales of the Transport.
Cost of Sales. Cost of sales increased to $2.1 million in 1995 from $0.8
million in 1994, representing an increase of 142%. This increase resulted
primarily from increased manufacturing volumes related to increased product
sales. In July 1995, the Company transferred its product manufacturing from
EndoSonics' facility to the Company's facility in Irvine, California.
Charge for Acquired In-process Research and Development. The Company
incurred a charge of $0.5 million in 1995 in connection with the 1995 payment by
EndoSonics of additional consideration related to the original acquisition by
EndoSonics of CVD stock. This portion of the excess of the purchase price of CVD
over the fair market value of the net assets acquired was recorded as in-process
research and development. The acquired in-process research and development was
immediately written off as CVD was in the development stage and had not yet
received regulatory approval for any of its products at the time of the
acquisition.
Research and Development. Research and development expenses increased to
$1.7 million in 1995 compared to $1.2 million in 1994, representing an increase
of 37%. This increase was due primarily to increased expenditures related to
development of the Company's FOCAL and M3 technology products. These expenses
also increased due to clinical trials and studies related to the FOCAL
technology products. The Company believes that it must maintain a substantial
commitment to research and development to remain competitive and expects
expenditures related to research and development to increase.
Marketing and Sales. Marketing and sales expenses increased to $1.5 million
in 1995 from $0.7 million in 1994, representing an increase of 104%. This
increase resulted from the development and expansion of the Company's U.S. sales
organization and marketing expenses related to the product launch of the
SmartNeedle products. The Company expects to expand its marketing and sales
force and expects expenses associated with marketing and sales to increase in
the future.
General and Administrative. General and administrative expenses increased
to $1.3 million in 1995 from $0.6 million in 1994, representing an increase of
127%. This increase resulted from expenses incurred as the Company commenced
operations as an independent entity, rather than as a division of EndoSonics,
and included the addition of a full-time Chief Executive Officer, increased
legal and accounting expenses, increased support staff and increased travel
expenses.
Other Income. Total other income remained relatively constant from 1994 to
1995.
19
<PAGE> 22
Three Months Ended March 31, 1995 and March 31, 1996
Sales Revenue. Sales revenue increased to $1.8 million in the three months
ended March 31, 1996 from $0.2 million in the three months ended March 31, 1995,
representing increased sales of the Company's FOCAL catheters, and the
introduction of additional products. Sales of products in Japan through the
Company's exclusive distribution relationship with Fukuda accounted for 22% of
the Company's revenue in the three months ended March 31, 1996.
License Fees and Other Revenue. License fees and other revenue from SCIMED
decreased to $0.1 million in the three months ended March 31, 1996 from $0.2
million in the three months ended March 31, 1995 due to scheduled payment
reductions in accordance with the provisions of the licensing agreement with
SCIMED.
Contract Revenue. Contract revenue was $0.2 million in the three months
ended March 31, 1996 and results from amounts earned under the ACS Agreements.
The Company had no such revenues in 1995.
Cost of Sales. Cost of sales increased to $0.9 million in the three months
ended March 31, 1996 from $0.1 million in the comparable period in 1995. This
increase resulted primarily from increased manufacturing volumes related to
increased product sales. In July 1995, the Company transferred its product
manufacturing from EndoSonics' facility to the Company's facility in Irvine,
California.
Research and Development. Research and development increased to $0.6
million in the three months ended March 31, 1996 compared to $0.4 million in the
three months ended March 31, 1995, representing an increase of 45%. This
increase resulted primarily from expenditures on the development of FOCAL
technology and vascular access products. The Company believes that it must
maintain a substantial commitment to research and development to remain
competitive and expects expenditures related to research and development to
increase.
Marketing and Sales. Marketing and sales expenses increased to $0.6
million in the three months ended March 31, 1996 from $0.3 million in the
comparable period in 1995, representing an increase of 126%. This increase
resulted mainly from the expansion of the Company's direct sales force in the
United States and marketing expenses related to the product launch of the FACT
catheter. The Company expects to expand its marketing and sales resources and
expects expenses associated with these activities to increase in the future.
General and Administrative. General and administrative expenses remained
unchanged at approximately $0.3 million in both the three months ended March 31,
1996 and 1995.
Other Income. Other income, principally interest income, remained
unchanged in both the three months ended March 31, 1996 and 1995.
The Company has experienced an operating loss for each of the last three
years. The Company expects to continue to incur operating losses through at
least 1997 and there can be no assurance that the Company will ever be able to
achieve or sustain profitability in the future. CVD's results of operations have
varied significantly from quarter to quarter. Quarterly operating results will
depend upon several factors, including the timing and amount of expenses
associated with expanding the Company's operations, the conduct of clinical
trials and the timing of regulatory approvals, new product introductions both in
the United States and internationally, the mix between pilot production of new
products and full-scale manufacturing of existing products, the mix between
domestic and export sales, variations in foreign exchange rates, changes in
third-party payors' reimbursement policies and healthcare reform. The Company
does not operate with a significant backlog of customer orders, and therefore
revenues in any quarter are significantly dependent on orders received within
that quarter. In addition, the Company cannot predict ordering rates by
distributors, some of whom place infrequent stocking orders. The Company's
expenses are relatively fixed and difficult to adjust in response to fluctuating
revenues. As a result of these and other factors, the Company expects to
continue to experience significant fluctuations in quarterly operating results,
and there can be no assurance that the Company will be able to achieve or
maintain profitability in the future.
20
<PAGE> 23
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its operations primarily from the
sale of its equity securities, advances from EndoSonics, licensing its
technologies and through international product distribution agreements. From
inception through March 31, 1996, the Company raised approximately $11.4 million
from the private sales of Preferred and Common Stock and $2.6 million in working
capital from EndoSonics. The Company intends to repay EndoSonics with a portion
of the proceeds from this offering. The Company has also received $0.2 million
and $2.0 million in licensing and contract revenue from ACS and SCIMED,
respectively, as well as $0.8 million from Fukuda in connection with an
exclusive distribution agreement. For the years ended December 31, 1995 and
1994, the Company's net cash used in operating activities was $2.1 million and
$1.5 million, respectively. The increase was primarily due to funding of
operating losses.
On March 31, 1996, the Company had cash, cash equivalents and short-term
investments of $8.7 million. The Company expects to incur substantial costs
related to, among other things, clinical testing, product development, marketing
and sales expenses, and increased working capital, prior to achieving positive
cash flow from operations. The Company anticipates that its existing capital
resources, together with the net proceeds from this offering and the interest
earned thereon, will be sufficient to fund its operations through 1997. The
Company's future capital requirements will depend on many factors, including its
funding requirements, research and development programs, the scope and results
of clinical trials, the regulatory approval process, the costs involved in
intellectual property rights enforcement or litigation, competitive products,
the establishment of manufacturing capacity, the establishment of sales and
marketing capabilities, and the establishment of collaborative relationships
with other parties. The Company may need to raise funds through additional
financings, including private or public equity offerings and collaborative
arrangements with existing or new corporate partners. There can be no assurance
that funds will be raised on favorable terms, or at all. If adequate funds are
not available, the Company may be required to delay, scale back or eliminate one
or more of its development programs or obtain funds through arrangements with
collaborative partners or others that may require the Company to grant rights to
certain technologies or products that the Company would not otherwise grant.
21
<PAGE> 24
BUSINESS
OVERVIEW
CardioVascular Dynamics, Inc. ("CVD" or the "Company") designs, develops,
manufactures and markets catheters used to treat certain vascular diseases. The
Company's catheters are used in conjunction with angioplasty and other
interventional procedures such as vascular stenting and drug delivery. The
Company's proprietary FOCAL and Multiple Microporous Membrane ("M3")
technologies enable physicians to deliver therapeutic radial force, stents,
drugs or contrast media accurately and effectively to the treatment site, and
also allow the perfusion of blood during an interventional procedure. The
Company believes that the combination of these technologies on a multiple
purpose catheter enables physicians to more effectively perform challenging
interventional procedures, which may result in improved treatment outcomes and
lower costs. The Company's catheters are designed to address three principal
challenges facing cardiologists: restenosis of a treated vessel, chronic total
occlusions and acute reclosure of a vessel during or soon after a procedure. The
Company has five issued and four allowed U.S. patents covering certain aspects
of its catheter technologies. Since commencing commercial sales in 1994, the
Company has sold more than 12,000 catheters.
INDUSTRY BACKGROUND
Cardiovascular disease, the leading cause of death in the United States, is
caused principally by atherosclerosis. Atherosclerosis is a progressive and
degenerative vascular disease in which cholesterol and other fatty materials are
deposited on the walls of blood vessels, forming a build-up known as plaque. The
accumulation of plaque narrows the interior of the blood vessels, thereby
reducing blood flow. Atherosclerosis in the coronary arteries can lead to heart
attack and death. In peripheral vessels, atherosclerosis can lead to decreased
mobility, loss of function and other complications of the affected limb.
Traditional treatments for atherosclerosis include drug therapy and
open-heart bypass surgery. Currently available drug therapies may alleviate some
of the symptoms of atherosclerosis but may be ineffective with severe disease
and may cause adverse side effects. Traditional open-heart bypass surgery
involves opening a patient's chest, cutting through the sternum, connecting the
patient to a heart/lung machine and grafting a blood vessel to redirect blood
flow around the occluded portion of an artery. Such a procedure is costly and
generally requires up to a week of hospitalization and an extensive recovery
period. In addition, certain companies are developing methods and devices for
performing bypass surgery using minimally invasive techniques.
The need for less invasive and less costly treatments for atherosclerosis
has led to the development of minimally invasive catheter-based treatments such
as balloon angioplasty ("PTCA" in the coronary arteries and "PTA" in the
peripheral arteries), atherectomy and laser angioplasty. These treatments
involve making a small incision in a patient's leg to access an artery and
inserting a catheter. Balloon angioplasty is a procedure in which a
balloon-tipped catheter is guided to the lesion (the site of the plaque) and
then inflated and deflated several times, delivering therapeutic radial force,
which cracks or reshapes the plaque and increases blood flow. Balloons used to
perform such procedures are characterized by their response to pressure as
either compliant (balloon diameter increases with increased pressure) or
non-compliant (balloon diameter remains relatively constant with increasing
pressure). Conventional balloon technology only allows the balloon to expand to
a single, uniform diameter along the length of the balloon. Because of
variations in vessel diameters at the lesion site, multiple catheters are often
required to treat a single lesion. In addition, conventional catheter
technologies often are unable to limit the delivery of therapeutic radial force
specifically to the lesion site and may damage the adjacent vessel wall.
Conventional catheter technology also interrupts blood flow when the balloon is
inflated, which may cause tissue damage, heart attack or death, particularly if
the balloon inflation required is of significant duration. Existing catheters
that do not perfuse blood require cardiologists to inflate and deflate the
balloon multiple times which may reduce the clinical effectiveness of the
treatment. Other treatments include the use of atherectomy catheters, which cut
or grind away the plaque, and laser angioplasty catheters, which deliver laser
energy to break down the plaque.
22
<PAGE> 25
Although catheter-based interventional therapies are generally successful
in initially increasing blood flow, studies indicate that after a traditional
coronary balloon angioplasty up to 50% of treated patients experience restenosis
(generally defined as a 50% or greater reduction in the lumen, or interior,
diameter of the treated vessel at the lesion site). In addition, studies show
that 5% to 8% of elective coronary balloon angioplasty patients may experience
acute reclosure of the treated vessel. Acute reclosure is an increase in the
severity of the vessel closure accompanied by a reduction in blood flow within
the vessel as a consequence of the intervention which occurs within 24 hours of
the procedure. A study has also indicated that angioplasty of chronic total
occlusions represents 10% to 20% of all coronary angioplasty procedures. A
chronic total occlusion is a complete blockage of the vessel preventing blood
flow beyond the lesion site. The Company believes that these challenges are
inadequately addressed with existing, single function, uniform diameter
angioplasty balloons. However, while the Company believes that its products
address certain disadvantages of existing catheter technology, limitations
remain in the use of balloon angioplasty to treat atherosclerosis. The Company's
products may not be suitable for the treatment of all forms of atherosclerosis.
For example, in many cases the existence of a total occlusion limits treatment
options to bypass surgery.
Coronary stents have recently emerged as an additional minimally invasive
device for the treatment of atherosclerosis. Stents were used initially for
treating failed angioplasty procedures and acute or threatened vessel closures.
However, improved techniques for the deployment and assessment of stents,
changes in accompanying drug therapy and advancements in stent technology have
led to the increased use of stents to treat restenosis. After an angioplasty,
atherectomy or other catheter-based treatment, a stent, which is a small metal
prostheses, is then advanced along a guidewire to the desired position, expanded
against the inside of the vessel wall and left in place. While certain stents
are self-expanding, most are deployed through the expansion of a compliant or
semi-compliant balloon. Following this deployment, physicians have increasingly
adopted the technique of using a second, high pressure non-compliant balloon to
further expand the stent. Despite advancements in stent technology, existing
compliant or semi-compliant balloons used for stent delivery are designed to
achieve a uniform diameter along the length of the balloon, and their use may
result in sub-optimal stent deployment or damage of the vessel adjacent to the
lesion.
Although there continue to be significant technological and clinical
advances in the treatment of cardiovascular disease, challenges remain in
cost-effectively treating certain conditions, including restenosis of a treated
vessel, chronic total occlusions and acute reclosure of a vessel during or soon
after a procedure. The Company believes that these challenges are inadequately
addressed with existing, single function, uniform diameter angioplasty balloons.
THE CARDIOVASCULAR DYNAMICS SOLUTION
CVD has utilized its core proprietary technologies to develop catheters
that provide clinical and cost benefits in the treatment of vascular disease.
The Company's proprietary FOCAL and M3 technologies, which may be utilized alone
or in combinations on a single catheter, enable physicians to deliver
therapeutic radial force, stents, drugs or contrast media accurately to the
treatment site, and also allow the perfusion of blood during an interventional
procedure. The Company believes that the combination of these technologies on a
single catheter enables physicians to cost-effectively treat vascular diseases
by reducing the cost of those procedures that require more than one catheter.
The Company's patented FOCAL technology combines compliant and
non-compliant balloon materials on a single catheter, creating a balloon that
has an adjustable, larger center diameter with fixed, smaller diameters at each
end. These characteristics allow a single balloon to expand to multiple
diameters, enabling the physician to perform interventional procedures in
vessels of varying diameters and anatomical locations. In particular, the FOCAL
technology enables cardiologists to incrementally increase the angioplasty
balloon's center diameter during a procedure to enhance the effectiveness of the
treatment in vessels that have uncertain or varying diameters or irregular
plaque deposits. Use of conventional catheter technology in these situations may
require multiple catheters to achieve a similar outcome. The FOCAL technology
may also reduce the incidental damage to the artery wall adjacent to the lesion,
as the therapeutic radial force is applied more accurately to the treatment
site.
23
<PAGE> 26
The Company's proprietary M(3) technology combines multiple membranes of
polymeric balloon material to form a single balloon that enables the accurate
delivery of drugs or contrast agents to the lesion or thrombus site. Drugs are
utilized by cardiologists to reduce the occurrence of restenosis and acute
reclosure, and to dissolve blood clots. Typically, therapeutic drug delivery is
accomplished by means of an intravenous injection, a method that requires larger
amounts of drug than is clinically required because the drug is diffused
throughout the body. The accurate delivery of drugs to the treatment site may
enhance the effectiveness of these pharmacological agents, thereby reducing the
quantity of drug required to achieve an acceptable clinical outcome and
potentially reducing the incidence of acute reclosure and restenosis. In
addition, the Company has developed M(3) catheters with multiple inner lumens,
providing the cardiologist with flexibility in drug treatment regimens. The
multiple lumens of the catheter may also be used to deliver contrast media for
angiographic viewing when advancing a catheter along a totally occluded vessel.
Traditional catheters must be removed to inject contrast media into a total
occlusion. Finally, the M(3) technology can be utilized to provide perfusion of
blood during an interventional procedure. The interruption in blood flow caused
by a conventional angioplasty balloon may cause tissue damage, heart attack or
death, particularly if the balloon inflation required is of significant
duration. Existing catheters that do not perfuse blood require cardiologists to
inflate and deflate the balloon multiple times for shorter periods which may
reduce the clinical effectiveness of the treatment.
STRATEGY
The Company's objective is to be a leader in the design, development and
commercialization of clinically effective solutions for certain vascular
diseases. While there can be no assurance that the Company will achieve this
objective, following are the key elements of CVD's strategy.
Maintain Technological Leadership and Product Technology
Advantages. CVD's strategy is to be a technological leader in the treatment
of vascular diseases through product innovation. The Company believes that
its products have significant performance advantages over alternative
catheter technologies. The Company intends to maintain and advance its
position of technology leadership through aggressive research, development
and clinical testing programs. The Company owns five issued and four
allowed U.S. patents related to key aspects of its catheter technologies
and has applied for additional U.S. patents as well as foreign patent
protection.
Market Products through Independent Distributors and a Direct
Salesforce. The Company currently markets its products through a
combination of independent distributors and a dedicated salesforce. The
Company currently employs nine direct sales people who target the more
densely-populated regions of the United States, and plans to significantly
expand its direct sales force over the next eighteen months. CVD utilizes
independent distributors internationally and in selected U.S. markets.
Establish Relationships with Clinical Opinion Leaders. The Company
believes that establishing relationships with clinical opinion leaders in
the field of interventional cardiology may raise the awareness of the
clinical and cost benefits of the Company's products. CVD is currently
conducting or planning three post-marketing clinical studies with certain
of such leaders. In addition, the Company consults with certain
cardiologists who assist the Company in ongoing product and technology
development.
Target International Markets. CVD seeks to commercialize its products
in those international markets where regulatory approval can be obtained
more quickly than in the United States. This enables CVD to generate
revenue more quickly from its product development efforts, to fund its
operations and increase awareness of its products within the international
interventional cardiology community.
Establish Strategic Partnerships. The Company attempts to identify and
evaluate potential strategic relationships where such relationships may
complement and expand the Company's research, development, sales and
marketing capabilities. The Company believes that such strategic
relationships may facilitate the market acceptance of the Company's
products.
24
<PAGE> 27
PRODUCTS
Catheter Products
The Company has utilized its FOCAL and M(3) technologies to develop
catheter products that address the challenges physicians experience in treating
vascular diseases. These technologies are available in various combinations on a
multiple-purpose catheter, thereby enabling physicians to cost-effectively treat
vascular disease. The Company's products are designed to be low profile (small,
uninflated diameter), enabling cardiologists to advance them along narrow
vessels, and flexible and trackable, enabling cardiologists to advance and
control them accurately within the vasculature.
The following table lists CVD's currently marketed products:
<TABLE>
<CAPTION>
INTENDED U.S. FIRST
PRODUCTS APPLICATIONS REGULATORY STATUS COMMERCIAL SALE
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------
FOCAL CATHETERS
CAT/CAT 15 PTCA or N/A(1) Q1 1995
Rail design Stent Delivery(2)
FACT/FACT 15 PTCA or PMA Supplement Q1 1996
Over-the-wire design Stent Delivery(2) Approved
FOCUS PTA 510(k) Clearance Q3 1995
Over-the-wire design
M(3) CATHETERS
Bullett Hi-Flo Total Occlusion 510(k) Clearance Q2 1996
Over-the-wire design Drug Delivery
(coronary)
Bullett F/X Total Occlusion 510(k) Clearance Q2 1996
Rail design Drug Delivery
(coronary)
Periflow Small-Vessel PTA/Drug Delivery 510(k) Clearance Q1 1996
Over-the-wire design
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) Available only outside the United States due to patent restrictions.
(2) Not approved in the United States for stent delivery. The marketing of this
product in the United States for such use will require the Company to obtain
a PMA supplement approval. The Company is not currently seeking such
approval.
FOCAL Catheters. The Company's FOCAL products have a catheter balloon that
has an adjustable, larger center diameter and smaller, fixed, distal and
proximal diameters. This characteristic provides increased utility in a variety
of therapeutic treatments and anatomical locations. Existing uniform diameter
catheters require cardiologists to use multiple balloons to treat vessels of
varying diameters, resulting in unnecessary costs. In addition, the FOCAL
catheters may deliver stents more effectively by focusing the radial deployment
force on the stented section, rather than along the entire balloon, which may
reduce the damage to the adjacent vessel.
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M(3) Catheters. The Company's M(3) catheters offer cardiologists the
ability to deliver drugs or contrast media to the treatment site accurately, and
enable the perfusion of blood during angioplasty procedures. These capabilities
may be combined on an interventional catheter to provide cardiologists the
functionality of multiple catheters, in a single, cost-effective device. The
accurate delivery of drugs to the treatment site may enhance the effectiveness
of these pharmacological agents and may reduce the quantity of drug required to
achieve an acceptable outcome. Drugs are utilized by cardiologists to reduce the
occurrence of restenosis and acute reclosure, and to dissolve blood clots.
Typically, therapeutic drug delivery is accomplished by means of an intravenous
injection, a method that requires larger amounts of drug than is clinically
required because the drug is diffused throughout the body. The Company's M(3)
technology enables cardiologists to deliver drugs directly to the treatment site
through a catheter's lumen, or interior channel. While CVD's M(3) site-specific
drug delivery catheters are currently marketed internationally, they can only be
used in the United States to administer drugs specifically approved by the FDA
for administration by such catheters. The multiple lumens of the catheter may
also be used to deliver contrast media for angiographic viewing when advancing
the catheter along a totally occluded vessel. Traditional catheters must be
removed to inject contrast media into a total occlusion. Finally, the M(3)
technology can be utilized to provide perfusion of blood during an
interventional procedure. This perfusion capability allows the balloon to be
inflated for longer durations and reduces the number of inflations and
deflations required in certain procedures, and may increase the clinical
effectiveness of the treatment.
Vascular Access Products
The Company's vascular access products utilize patented technology to
provide rapid, accurate access to the body's vascular system for guidewire and
catheter entry. The principal current product, called the SmartNeedle, was
acquired from ACS and is based on Doppler ultrasound technology. A miniaturized
ultrasound chip is placed at the tip of a disposable ultrasonic probe which is
then placed inside a conventional vascular access needle. The probe is then
connected to a separate reusable monitor. Once placed in the body as a part of
the access needle, the Doppler chip emits an audible signal which enables the
physician to more accurately determine whether or not the needle resides in the
proper location within the intended arterial or venous lumen. Once positioned
properly, the probe is removed, leaving the conventional access needle in place
within the artery or vein. Since introduction, the SmartNeedle's primary use has
been in interventional cardiology and radiology procedures.
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NEW PRODUCT DEVELOPMENT
The Company focuses its research and development efforts on utilizing the
Company's proprietary processes and patented technologies to develop
cost-effective products that address existing and emerging clinical demands. The
Company's strategy is to refine its existing technologies and to enhance the
performance of its existing product offerings, including efforts to make its
FOCAL and M(3) products lower profile, more flexible and trackable, and operable
at a broader range of inflation pressures. In addition, the Company is
developing additional products utilizing combinations of its technologies that
may provide cardiologists greater therapeutic applicability in a single device.
The Company is also in the process of developing unique catheter designs
intended to provide enhanced delivery of therapeutic radial force and
pharmacological agents. The Company will be required to seek FDA approval for
any new product and it is expected that some of these products will be subject
to the PMA process. The Company's current new product development efforts are
summarized in the table below.
<TABLE>
<S> <C> <C>
PRODUCTS INTENDED APPLICATIONS U.S. REGULATORY
STATUS
- ----------------------------------------------------------------------------------------------
FOCAL CATHETERS
ARC PTCA PMA Supplement
Over-the-wire design Approved
ARC II PTCA or Development Stage
Over-the-wire design Stent Delivery
Lynx PTCA or Development Stage
Rail design Stent Delivery
Facilitated Force Controlled Plaque Incision and PTCA Development Stage
Angioplasty
FOCALSTENT Coronary Stent Development Stage
M(3)CATHETERS
Transport(1) PTCA/Drug Delivery Development Stage
Periflow Large-Vessel PTA/Drug Delivery 510(k) Clearance
MicroMembrane Radiation Delivery of Radioactive Materials Development Stage
for Restenosis Prevention
MAC I(2) Perfusion/PTCA Development Stage
MAC II Perfusion/Drug Delivery Development Stage
MAC III Perfusion/PTCA/Drug Delivery Development Stage
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
</TABLE>
(1) Licensed to SCIMED. See "-- Strategic Relationships."
(2) Licensed to ACS. See "-- Strategic Relationships."
The M(3) technology is being utilized in various experimental clinical
programs to administer the site-specific delivery of therapeutic agents
following angioplasty or stent delivery for the purpose of reducing or
eliminating restenosis. The Company is also using M(3) technology in its
MicroMembrane Radiation Therapy development program for restenosis prevention.
This program is evaluating CVD's M(3) technology to more accurately deliver
radioactive substances specifically to the treatment site.
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TECHNOLOGY
The Company has developed proprietary material manufacturing processes that
it has utilized to develop patented interventional catheters. Traditional
balloon extrusion technology does not enable the combination of compliant and
non-compliant materials, resulting in a catheter that can be inflated only to a
uniform diameter. The Company's FOCAL technology bonds a membrane between
compliant and non-compliant materials, resulting in a balloon with a large
center diameter and smaller, fixed diameters at each end. The center compliant
section of the FOCAL catheter enlarges predictably at a rate of 0.1mm per
atmosphere of pressure when inflation pressures exceed six atmospheres. The ends
of the balloon remain at their nominal diameters and do not expand with
increased pressure. The FOCAL capability enables cardiologists to deliver stents
or therapeutic radial force accurately to the treatment site, while minimizing
the force applied to adjacent tissue. Conventional uniform diameter catheters
may damage healthy vessel sections, as these sections receive as much radial
force as do the diseased sites. It is widely believed that vessel wall damage
may lead to acute reclosure of the vessel or restenosis.
The Company's M(3) technology creates a membrane by applying mechanical and
radiation treatment to standard polymeric balloon material during the extrusion
process. Microporous holes are then drilled in the resulting material by
proprietary mechanical or laser drilling processes. CVD's M(3) technology also
enables blood to flow through a coil lumen or inner shaft of the catheter,
allowing perfusion to the distal vessels (those beyond the treatment site)
during angioplasty or drug delivery. Prior to inflation, the balloon acts as a
shaft for the distal portion of the catheter. Once the balloon is inflated, the
cardiologist advances a coil into and through the inner lumen of the inflated
balloon. The coil supports the balloon during balloon angioplasty or drug
delivery and facilitates the perfusion of the distal vessels. The M(3)
technology enables the Company to combine balloon angioplasty and perfusion
capabilities on a single catheter in a profile comparable to standard balloon
angioplasty catheters without perfusion capability. The Company believes that
the M(3) technology also enables it to combine PTCA and perfusion capabilities
on a single catheter with a lower profile than any currently marketed catheter
with similar capabilities.
MANUFACTURING
With the exception of certain final assembly and sterilization procedures
for those products designed to be sold only outside the United States, and the
manufacture of those products which the Company has licensed to third parties,
all of the Company's products are produced in its facilities in Irvine,
California. The Company fabricates certain proprietary components, then
assembles, inspects, tests and packages all components into finished products.
By designing and assembling its catheter products, the Company believes it is
better able to control quality and costs, limit third-party access to its
proprietary technology, and manage manufacturing process enhancements and new
product introductions. In addition, the Company purchases many standard and
custom-built components from independent suppliers and subcontracts certain
processes from independent vendors. Most of these components and processes are
available from more than one vendor. However, certain manufacturing processes
are currently performed by single vendors. While the Company believes that there
are other vendors available to perform these processes, an interruption of
performance by any of these vendors could have a material adverse effect on the
Company's ability to manufacture its products until a new source of supply were
qualified and, as a result, could have an adverse effect on the Company's
business, financial condition and results of operations.
The Company's success will depend in part upon its ability to manufacture
its products in compliance with ISO 9001, the FDA's GMP regulations, CDHS
licensing and other regulatory requirements, in sufficient quantities and on a
timely basis, while maintaining product quality and acceptable manufacturing
costs. The Company began manufacturing certain of its products at its facilities
in July 1995. Accordingly, the Company has very limited experience in
manufacturing its products. In addition, the Company currently intends to
introduce a significant number of new products in 1996. The Company has
undergone and expects to continue to undergo regular GMP inspections in
connection with the manufacture of its products at the Company's facilities. The
Company's success will depend, among other things, upon its ability to
efficiently manage the simultaneous manufacture of different products and to
integrate the manufacture of new products with existing products. There can be
no assurance that the Company will not encounter difficulties in scaling up
production of new products, including problems involving production yields,
quality control and assurance, component supply and shortages of qualified
personnel. The Company's failure to successfully commence the
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manufacturing of these new products, or to increase production volumes of new
and existing products in a timely manner, would materially adversely affect the
Company's business, financial condition and results of operations. Failure to
increase production volumes in a timely or cost-effective manner or to maintain
compliance with ISO 9001, GMP regulations, CDHS or other regulatory requirements
could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Risk Factors -- Limited Manufacturing
Experience."
MARKETING AND SALES
The Company's products are sold in the United States and international
markets, principally Europe and Japan. However, certain of the Company's
products are not available in each market due to regulatory and intellectual
property restrictions. The Company currently sells its products through a
combination of strategic partners, medical device distributors and nine direct
sales personnel. The Company is a party to three agreements for the U.S.
distribution of products incorporating its FOCAL and M(3) technologies. CVD also
has distribution agreements with 18 companies covering 35 countries outside the
United States and Japan. CVD distributes certain products in Japan through an
exclusive distribution agreement with Fukuda. Sales of the Company's products
through Fukuda accounted for 18% and 22% of the Company's revenue in 1995 and
the first three months of 1996, respectively. In addition, sales to JJIS
accounted for 12% of revenue in 1995. The Company intends to expand its sales
and marketing capability and to distribute selected new products through
strategic partnerships. See "Risk Factors -- Limited Marketing and Sales
Resources; Dependence Upon Strategic Relationships."
In 1993, 1994, 1995 and the first three months of 1996, total export sales
were $101,000, $970,000, $2,054,000 and $1,138,000, respectively, or
approximately 80%, 83%, 59% and 64%, respectively, of total product sales. In
1993, 1994, 1995 and the first three months of 1996 sales to Europe accounted
for $101,000, $255,000, $1,179,000 and $411,000, respectively; sales to Japan
represented $0, $715,000, and $744,000 and $455,000, respectively; and sales to
Latin America represented $0, $0, $131,000 and $272,000, respectively. The
Company expects to continue to derive significant revenue from international
sales and therefore a significant portion of the Company's revenues will
continue to be subject to the risks associated with international sales,
including economic or political instability, shipping delays, changes in
applicable regulatory policies, inadequate protection of intellectual property,
fluctuations in foreign currency exchange rates and various trade restrictions,
all of which could have a significant impact on the Company's ability to deliver
products on a competitive and timely basis. Future imposition of, or significant
increases in the level of, customs duties, export quotas or other trade
restrictions, could have an adverse effect on the Company's business, financial
condition and results of operation. In foreign countries, the Company's products
are subject to a wide variety of governmental review and certification. The
regulation of medical devices, particularly in the European Community, continues
to expand and there can be no assurance that new laws or regulations will not
have an adverse effect on the Company. See Note 1 of Notes to Financial
Statements. See "Risk Factors -- Dependence Upon International Sales."
POST-MARKETING CLINICAL STUDIES
The Company has completed the clinical trials required for FDA approval of
those products which are marketed in the United States. In addition to those
trials, the Company is also sponsoring two controlled, randomized, multicenter
clinical studies in the United States and overseas to continue to evaluate the
clinical and economic value of its core technologies. Data from these studies
are being accumulated and analyzed to support the marketing of the Company's
current products.
In a Comparative Performance and Pathological Study conducted by the
Division of Cardiology at the University of Texas Department of Medicine, the
Company's FACT catheter was compared with conventional PTCA catheters from other
leading manufacturers in an animal study. The investigators concluded that the
use of the FACT catheter resulted in reduced arterial damage without reduction
in catheter performance as determined by catheter preparation, trackability,
pushability, inflation/deflation and angiographic visualization.
A second study is comparing the FOCAL PTCA catheter with conventional PTCA
catheters. The FOCAL Lesion Expansion Optimizes Results Study ("FLEXOR Study")
will evaluate the efficacy of FOCAL technology in improving clinical results
following angioplasty procedures. Success will be measured
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based on the ability of FOCAL technology to improve the minimal lumen diameter
("MLD") of the arterial opening, to increase safety and to reduce the number of
catheters necessary for PTCA procedures. Results will be interpreted in light of
any procedure-related vascular complications, restenosis and occurrences of
other major clinical adverse cardiac events. MLD is a commonly-used measurement
of the ability of a therapeutic tool to open a blocked artery and reestablish
required blood flow. The FLEXOR Study protocol is being finalized and is
expected to begin during the third quarter of 1996. Completion is expected in
1997.
Certain of the Company's products which utilize FOCAL technology have
received FDA approval for PTCA and PTA indications. However, none of these
products has received FDA approval for use in stent delivery. An
investigator-controlled study is currently testing the Company's FOCAL
technology with respect to stent implantation. The Optimal Stent Implantation
Study ("OSTI-2 Study") is evaluating the ability of stent delivery with FOCAL
technology compared with conventional delivery techniques to reduce acute
outcomes and restenosis rates. The study is being conducted using two patient
subgroups of approximately 100 patients each divided according to vessel size.
In the first group, stent delivery is being evaluated in vessels greater than
three millimeters in diameter; in the second group stent delivery is being
evaluated in vessels less than three millimeters in diameter. Each subgroup
presents different clinical issues related to stent delivery and the OSTI-2
Study protocol is evaluating the efficacy of FOCAL technology in each subgroup.
The OSTI-2 Study began in February 1996 and is expected to be completed in 1997.
The Company also intends to sponsor additional studies from time to time to
assess the value of, and to expand clinical indications of, its existing and new
technologies. The Company is planning a clinical study to expand the clinical
uses of its FOCAL technology catheters to include balloon dilatation of
previously deployed stents in order to properly implant the stent in the
arterial wall. The Company is finalizing the clinical protocol for this study
and expects to begin this study prior to the end of 1996. This study will
include approximately 100 patients and is expected to be completed in 1997.
STRATEGIC RELATIONSHIPS
The Company evaluates on an ongoing basis potential strategic relationships
with corporate and other partners where such relationships may complement and
expand CVD's research, development, sales and marketing capabilities. The
Company is currently a party to four such agreements, described below.
Advanced Cardiovascular Systems, Inc.. In January 1995, the Company entered
into a license agreement with ACS. The parties subsequently confirmed their
understanding with respect to certain matters in a second agreement dated March
4, 1996 (collectively, the "ACS Agreements"). Under the ACS Agreements, the
Company acquired certain rights to ACS' SmartNeedle technology, subject to the
payment of certain royalties. ACS was granted the option to acquire the
exclusive worldwide rights to certain CVD perfusion technology, which ACS
exercised on February 14, 1996. As a result, ACS has an exclusive worldwide
right to develop, manufacture and market the Company's MAC I product line. In
exchange for this technology, ACS is obligated to make milestone and minimum
annual royalty payments to CVD, and also has certain obligations to develop and
market the technology. In addition, in the event that CVD develops a product
which combines coronary balloon angioplasty, perfusion and drug delivery
technology on the same catheter, ACS will have certain rights to license such
product. The ACS Agreements may be terminated upon 60 days notice in the event
of a breach by the other party, subject to the breaching party's right to cure,
or by ACS upon 30 days notice without cause.
SCIMED Life Systems, Inc. The Company has entered into a Stock Purchase and
Technology License Agreement, dated September 10, 1994, with SCIMED (the "SCIMED
Agreement"). Pursuant to the SCIMED Agreement, SCIMED purchased a 19% equity
position in the Company. SCIMED was also granted an exclusive worldwide license
to certain combined site-specific drug delivery and coronary angioplasty
technology, including the Company's Transport products, for use in the
cardiovascular field in exchange for license and royalty fees. The SCIMED
Agreement also requires CVD to provide certain technical assistance and to
perform additional research and development relating to the licensed technology
in exchange for fees and reimbursement of expenses. In the event that CVD's
SCIMED-funded research and development efforts result in improvements to the
licensed technology, SCIMED will have an exclusive worldwide license to the
technology in the cardiovascular field and a non-exclusive license outside the
cardiovascular field, both of which are subject to the payment of royalties. The
SCIMED Agreement may be
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terminated in the event of breach on 90 days notice by the non-breaching party
(or on 30 days notice in certain limited circumstances) or by SCIMED upon 180
days notice.
Fukuda Denshi Co., Ltd. The Company has entered into a Distribution
Agreement, dated May 28, 1993, with Fukuda Denshi Co., Ltd. (the "Fukuda
Agreement"), whereby Fukuda serves as CVD's exclusive distributor for certain of
the Company's products in Japan. In exchange for this exclusive distributorship,
Fukuda paid a fee to CVD in addition to payments owing upon the purchase of the
products. Fukuda also agreed to undertake all necessary clinical trials to
obtain approval from Japanese regulatory authorities for the sale of the
products in Japan. Fukuda's purchases under the Fukuda Agreement are subject to
certain minimum requirements. The initial term of the Fukuda Agreement expires
on May 31, 1998, subject to a five-year extension. The Fukuda Agreement may also
be terminated in the event of breach upon 90 days notice by the non-breaching
party. In July 1995 and May 1996, the distribution agreement with Fukuda was
amended to grant Fukuda exclusive distribution rights to additional CVD
products. Under these amendments, the Company received a $750,000 investment
which is convertible by Fukuda into Common Stock upon the consummation of this
offering (the "Convertible Obligation").
EndoSonics Corporation. The Company has entered into a license agreement
with EndoSonics, dated December 22, 1995 (the "EndoSonics Agreement"), pursuant
to which CVD granted EndoSonics the non-exclusive, royalty-free right to CVD's
FOCAL technology for the development and sale of a combined FOCAL/Ultrasound
product. In exchange, CVD received the non-exclusive, royalty-free right to
submit PMA supplement applications utilizing an EndoSonics PMA as a reference
and to manufacture and distribute CVD products as a supplement to the EndoSonics
PMA. The EndoSonics Agreement may be terminated in the event of breach upon 60
days notice by the non-breaching party, subject to the breaching party's right
to cure. In the event of termination, the Company would be prohibited from
submitting new PMA supplements referencing the EndoSonics PMA and would be
required to seek independent FDA approval for such products, which would have a
material adverse effect on the Company's business, financial condition and
results of operations. In addition, EndoSonics recently purchased 400,000 shares
of CVD's Series B Preferred Stock for a purchase price of $8,000,000, which will
convert into 800,000 shares of Common Stock upon the consummation of this
offering. See "Certain Transactions -- Relationship with EndoSonics
Corporation."
PATENTS AND PROPRIETARY INFORMATION
The Company's policy is to protect its proprietary position by, among other
methods, filing U.S. and foreign patent applications to protect technology,
inventions and improvements that are important to the development of its
business. The Company has five issued and four allowed U.S. patents covering
certain aspects of its catheter technology and licenses additional patents
relating to the vascular access technology. Eleven additional patent
applications have been submitted to the U.S. Patent Office and additional patent
applications have been submitted to international agencies for review. No
assurance can be given that pending patent applications will be approved, or
that any issued patents will provide competitive advantages for the Company's
products, or that they will not be challenged or circumvented by competitors.
The interventional cardiovascular market in general and the balloon
angioplasty catheter market (including the type of catheters offered by CVD) in
particular have been characterized by substantial litigation regarding patent
and other intellectual property rights. Although the Company believes that its
products do not infringe other parties' patents and proprietary rights, there
can be no assurance that its products do not infringe such patents or rights. In
the event that any such third-parties assert claims against the Company for
patent infringement and such patents are upheld as valid and enforceable, the
Company could be prevented from utilizing the subject matter claimed in such
patents, or would be required to obtain licenses from the owners of any such
patents or redesign its products or processes to avoid infringement. There can
be no assurance that such licenses would be available or, if available, would be
so on terms acceptable to the Company or that the Company would be successful in
any attempt to redesign its products or processes to avoid infringement. In
addition, foreign intellectual property laws may not provide protection
commensurate with that provided by U.S. intellectual property laws, and there
can be no assurance that foreign intellectual property laws will adequately
protect the Company's intellectual property rights abroad. The Company also
relies on trade secrets and proprietary technology and enters into
confidentiality and non-disclosure agree-
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ments with its employees, consultants and advisors. There can be no assurance
that the confidentiality of such trade secrets or proprietary information will
be maintained by employees, consultants, advisors or others, or that the
Company's trade secrets or proprietary technology will not otherwise become
known or be independently developed by competitors in such a manner that the
Company has no practical recourse. Litigation may be necessary to defend against
claims of infringement or invalidity, to enforce patents issued to the Company
or to protect trade secrets. There can be no assurance that any such litigation
would be successful. Any litigation could result in substantial costs to, and
diversion of resources by, the Company and its officers, which would have a
material adverse effect on its business, financial condition and results of
operations. See "Risk Factors -- Reliance on Patents and Proprietary Technology;
Risk of Patent Infringement."
COMPETITION
The Company believes that the primary competitive factors in the market for
interventional cardiology devices are: clinical effectiveness, product safety,
catheter size, flexibility and trackability, ease of use, reliability, price and
availability of third party reimbursement. In addition, a company's distribution
capability and the time in which products can be developed and receive
regulatory approval are important competitive factors. The Company believes it
competes favorably with respect to the foregoing factors. The Company also
believes that its competitive position is dependent upon its ability to continue
to develop innovative new catheter technologies and obtain rapid regulatory
approval.
Competition in the market for devices used in the treatment of
cardiovascular and peripheral vascular disease is intense, and is expected to
increase. The interventional cardiology market is characterized by rapid
technological innovation and change, and the Company's products could be
rendered obsolete as a result of future innovations. The Company's catheters
compete or will compete with catheters marketed by a number of manufacturers,
including ACS, SCIMED, JJIS and Cordis Corporation, subsidiaries of Johnson &
Johnson, Medtronic, Inc., C.R. Bard, Inc. and Schneider USA, a subsidiary of
Pfizer, Inc. Such companies have significantly greater financial, management and
other resources, established market positions, and significantly larger sales
and marketing organizations than does the Company. The Company also faces
competition from manufacturers of other catheter-based atherectomy devices,
vascular stents and pharmaceutical products intended to treat vascular disease.
In addition, the Company believes that many of the purchasers and potential
purchasers of the Company's products prefer to purchase catheter products from a
single source. Accordingly, many of the Company's competitors, because of their
size and range of product offerings, have a competitive advantage over the
Company. There can be no assurance that the Company's competitors will not
succeed in developing or marketing technologies and products that are more
clinically effective or cost effective than any that are being marketed or
developed by the Company, or that such competitors will not succeed in obtaining
regulatory approval for introducing or commercializing any such products prior
to the Company. See "Risk Factors -- Significant Competition."
THIRD-PARTY REIMBURSEMENT
In the United States, the Company's products are purchased primarily by
medical institutions, which then bill various third-party payors, such as
Medicare, Medicaid, and other government programs and private insurance plans,
for the health care services provided to patients. Government agencies, private
insurers and other payors determine whether to provide coverage for a particular
procedure and reimburse hospitals for medical treatment at a fixed rate based on
the diagnosis-related group ("DRG") established by the U.S. HCFA. The fixed rate
of reimbursement is based on the procedure performed, and is unrelated to the
specific devices used in that procedure. If a procedure is not covered by a DRG,
payors may deny reimbursement. In addition, some payors may deny reimbursement
if they determine that the device used in a treatment was unnecessary,
inappropriate or not cost-effective, experimental or used for a non-approved
indication. Reimbursement of interventional procedures utilizing the Company's
products is currently covered under a DRG. There can be no assurance that
reimbursement for such procedures will continue to be available, or that future
reimbursement policies of payors will not adversely affect the Company's ability
to sell its products on a profitable basis. Failure by hospitals and other users
of the Company's products to obtain reimbursement from
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third-party payors, or changes in government and private third-party payors'
policies toward reimbursement for procedures employing the Company's products,
would have a material adverse effect on the Company's business, financial
condition and results of operations. See "Risk Factors -- Limitations on
Third-Party Reimbursement."
GOVERNMENT REGULATION
The manufacturing and marketing of the Company's products are subject to
extensive and rigorous government regulation in the United States and in other
countries. The Company believes that its success will be significantly dependent
upon commercial sales of improved versions of its catheter products. The Company
will not be able to market these new products in the United States unless and
until the Company obtains approval or clearance from the FDA. Foreign and
domestic regulatory approvals, if granted, may include significant limitations
on the indicated uses for which a product may be marketed.
If a medical device manufacturer can establish that a newly developed
device is "substantially equivalent" to a legally marketed Class I or Class II
device, or to a Class III device that the FDA has not called for a PMA, the
manufacturer may seek clearance from the FDA to market the device by filing a
premarket notification with the FDA under Section 510(k) of the Federal Food,
Drug, and Cosmetic Act. All of the 510(k) clearances received for the Company's
catheters were based on substantial equivalence to legally marketed devices.
There can be no assurance that 510(k) clearance for any future product or
significant modification of an existing product will be granted or that the
process will not be unduly lengthy. In addition, if the FDA has concerns about
the safety or effectiveness of any of the Company's products, it could act to
withdraw approval or clearances of those products or request that the Company
present additional data. Any such actions would have a material adverse effect
on the Company's business, financial condition and results of operations.
If substantial equivalence cannot be established, or if the FDA determines
that the device or the particular application for the device requires a more
rigorous review to assure safety and effectiveness, the FDA will require that
the manufacturer submit a PMA application that must be reviewed and approved by
the FDA prior to sales and marketing of the device in the United States. The PMA
process is significantly more complex, expensive and time consuming than the
510(k) clearance process and always requires the submission of clinical data. It
is expected that certain of the Company's products under development will be
subject to this PMA process. The Company currently has a non-exclusive,
royalty-free right to submit PMA supplement applications utilizing an EndoSonics
PMA as a reference and to manufacture and distribute CVD products as a
supplement to the EndoSonics PMA. This agreement may be terminated in the event
of breach upon 60 days notice by the non-breaching party, subject to the
breaching party's right to cure. In the event of termination, the Company would
be prohibited from submitting new PMA supplements referencing the EndoSonics PMA
and would be required to seek independent FDA approval for any such products,
which would have a material adverse effect on the Company's business, financial
condition and results of operations.
The Company is also required to register as a medical device manufacturer
with the FDA and maintain a license with certain state agencies, such as the
CDHS. As such, the Company is inspected on a routine basis by both the FDA and
the CDHS for compliance with GMP regulations. These regulations require that the
Company manufacture its products and maintain related documentation in a
prescribed manner with respect to manufacturing, testing and control activities.
The Company has also undergone and expects to continue to undergo regular GMP
inspections in connection with the manufacture of its products at the Company's
facilities. Further, the Company is required to comply with various FDA
requirements for labeling. The Medical Device Reporting laws and regulations
require that the Company provide information to the FDA on deaths or serious
injuries alleged to have been associated with the use of its devices, as well as
product malfunctions that would likely cause or contribute to death or serious
injury if the malfunction were to recur. In addition, the FDA prohibits an
approved device from being marketed for unapproved applications. CVD has
received FDA approval to market the FACT catheters, which utilize the FOCAL
technology, for coronary balloon angioplasty. These catheters are marketed
outside the United States for use in stent deployment. However, without specific
FDA approval for stent deployment, these catheters may not be marketed by the
Company in the United States for such use.
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Failure to comply with applicable regulatory requirements can, among other
consequences, result in fines, injunctions, civil penalties, suspensions or loss
of regulatory approvals, product recalls, seizure of products, operating
restrictions and criminal prosecution. In addition, government regulations may
be established in the future that could prevent or delay regulatory clearance or
approval of the Company's products. Delays in receipt of clearances or
approvals, failure to receive clearances or approvals or the loss of previously
received clearances or approvals would have a material adverse effect on the
Company's business, financial condition and results of operations.
The Company is also subject to other federal, state and local laws,
regulations and recommendations relating to safe working conditions, laboratory
and manufacturing practices. The extent of government regulation that might
result from any future legislation or administrative action cannot be accurately
predicted. Failure to comply with regulatory requirements could have a material
adverse effect on the Company's business, financial condition and results of
operations.
International sales of the Company's products are subject to the
registration requirements of each country. The regulatory review process varies
from country to country and may in some cases require the submission of clinical
data. The Company typically relies on its distributors in such foreign countries
to obtain the requisite regulatory approvals. There can be no assurance,
however, that such approvals will be obtained on a timely basis or at all. In
addition, the FDA must approve the export to certain countries of devices that
require a PMA but are not yet approved domestically.
The Company is in the process of implementing policies and procedures which
are intended to allow the Company to receive ISO 9001 certification of its
quality system. The ISO 9000 series of standards for quality operations has been
developed to ensure that companies know the standards of quality to which they
must adhere to receive certification. The European Union has promulgated rules
which require that medical products receive by mid-1998 the right to affix the
CE mark, an international symbol of adherence to quality assurance standards and
compliance with applicable European medical device directives. ISO 9001
certification is one of the CE mark certification requirements. Failure to
receive the right to affix the CE mark will prevent the Company from selling its
products in member countries of the European Union. While the Company is in the
process of becoming ISO 9001 certified, there can be no assurance that the
Company will be successful in meeting these or any other certification
requirements on a timely basis, or at all.
PRODUCT LIABILITY
The Company faces the risk of financial exposure to product liability
claims. The Company's products are often used in situations in which there is a
high risk of serious injury or death. Such risks will exist even with respect to
those products that have received, or in the future may receive, regulatory
approval for commercial sale. The Company is currently covered under EndoSonics'
product liability insurance policy with coverage limits of $2.0 million per
occurrence and $2.0 million per year in the aggregate. However, this coverage
will terminate when the Company ceases to be a majority-owned subsidiary of
EndoSonics. Accordingly, following this offering, the Company expects to obtain
product liability insurance with similar coverage limits. There can be no
assurance that the Company's product liability insurance is adequate or that
such insurance coverage will remain available at acceptable costs. There can be
no assurance that the Company will not incur significant product liability
claims in the future. A successful claim brought against the Company in excess
of its insurance coverage could have a material adverse effect on the Company's
business, financial condition and results of operations. Additionally, adverse
product liability actions could negatively affect the reputation and sales of
the Company's products and the Company's ability to obtain and maintain
regulatory approval for its products and substantially divert the time and
effort of management away from the Company's operations.
EMPLOYEES
As of April 30, 1996, the Company had 92 employees, including 56 in
manufacturing, 12 in research, development and regulatory affairs, 15 in sales
and marketing, 5 in administration and 4 in quality assurance. The Company
believes that the success of its business will depend, in part, on its ability
to attract and retain qualified personnel. The Company believes it has good
relations with its employees.
34
<PAGE> 37
PROPERTIES
Currently, the Company leases facilities aggregating approximately 22,000
square feet in Irvine, California under lease agreements which expire beginning
in 1997. The Company believes that its facilities are adequate to meet its
requirements through 1997.
35
<PAGE> 38
MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES
The executive officers, directors and key employees of the Company, and
their ages as of April 30, 1996, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---------------------------------- --------- ---------------------------------------
<S> <C> <C>
Michael R. Henson................. 50 President, Chief Executive Officer and
Chairman of the Board of Directors
Dana P. Nickell................... 46 Vice President, Finance and
Administration, Chief Financial Officer
and Secretary
Michael D. Crocker................ 39 Vice President, Engineering
Jeffrey F. O'Donnell.............. 36 Vice President, Sales and Marketing
Bart R. Navarro................... 50 Director of Manufacturing
Claire K. Walker.................. 49 Director of Clinical Affairs
George F. Kick.................... 50 Business Manager, Peripheral Products
Blair W. Breyne................... 37 Director of International Market
Development
Robert J. Imdieke................. 42 Manager, Quality Assurance
Mitchell Dann(1).................. 35 Director
William G. Davis(1)............... 64 Director
Gerard von Hoffmann(2)............ 40 Director
Edward M. Leonard(2).............. 54 Director
</TABLE>
- ---------------
(1) Member of Compensation Committee
(2) Member of Audit Committee
Michael R. Henson joined the Company as President and Chief Executive
Officer in February 1995. Prior to joining CVD, Mr. Henson served as the Chief
Executive Officer of EndoSonics from 1988 to February 1995. He was appointed
Chairman of the Board of Directors of EndoSonics in February 1993. Between April
1983 and February 1988, Mr. Henson served as President and Chief Executive
Officer of Trimedyne, Inc., a manufacturer of medical lasers and catheters.
Prior to joining Trimedyne in 1983, Mr. Henson held positions as Vice President
for G.D. Searle & Company, Director of Marketing for the Hospital Products
Division of Abbott Laboratories, and Marketing Manager for Bristol Myers and
Company.
Dana P. Nickell joined the Company as Vice President, Finance and
Administration and Chief Financial Officer in December 1995 and was appointed
Secretary in May 1996. Prior to joining CVD he was Chief Financial Officer of
Innerspace Inc., a medical device manufacturer which filed for bankruptcy
protection in 1995, from May 1994 to April 1995. From August 1993 until April
1994, Mr. Nickell served as Chief Financial Officer of Masimo Corporation, a
developer of pulse oximeter technology. Between November 1988 and June 1993, Mr.
Nickell was Chief Financial Officer and Vice President, Finance, Administration
and Business Development of EndoSonics. He also served as Secretary of
EndoSonics from January 1990 to August 1992. Mr. Nickell is a Certified Public
Accountant.
Michael D. Crocker has served as Vice President, Engineering since the
incorporation of CVD in March 1992. From March 1991 to March 1992, Mr. Crocker
was involved with start-up activities related to CVD. From January 1989 to March
1991, Mr. Crocker provided product development consulting to the following
companies: Medtronic, Advanced Interventional Systems, Pilot Cardiovascular and
Imagyn Medical. From November 1986 to January 1989, he served in product
development at Trimedyne, and from March 1983 to November 1986 in product
development and manufacturing at ACS.
Jeffrey F. O'Donnell has served as Vice President, Sales & Marketing at the
Company since November 1995. Prior to joining CVD, Mr. O'Donnell served as
President and Vice President of Marketing and Business Development of Kensey
Nash Corporation, a medical device manufacturer, from January 1994 to May 1995.
36
<PAGE> 39
From 1988 to 1994 Mr. O'Donnell held various sales and regional management
positions at ACS. Prior to working at ACS, Mr. O'Donnell held senior sales and
marketing positions with Boston Scientific and Johnson & Johnson.
Bart R. Navarro joined the Company in February 1995 as Director of
Manufacturing. From September 1989 to February 1995, Mr. Navarro served as
Director of Manufacturing for Eclipse Surgical Technologies, Inc. From March
1985 to September 1989, Mr. Navarro served as Manager of Manufacturing for MCM
Laboratories, Inc., a medical device manufacturer. From June 1981 to March 1985,
Mr. Navarro served as a Process Engineer for Manufacturing for ACS.
Claire K. Walker has served as Director of Clinical Affairs of the Company
since November 1994. From May 1992 to November 1994, Ms. Walker provided
clinical marketing consulting services to CVD. From September 1990 to November
1992, Ms. Walker served as a principal of CKW and Associates providing project
specific consulting services to InterVentional Technologies, Inc., a medical
device company. From July 1981 to August 1988, Ms. Walker was employed by ACS as
a clinical specialist and from 1984 through 1988 worked as a direct sales
representative. Ms. Walker also worked as a cardiovascular catheterization
laboratory nurse.
George F. Kick joined the Company in March 1995 and served as Director of
U.S. Marketing until December 1995 when he became the Business Manager,
Peripheral Products. From January 1992 to March 1995, Mr. Kick worked as a
consultant and project manager at NeuroNavigational, a medical device
manufacturer, developing minimally invasive vascular surgical systems for
arterial bypass in the leg. From February 1979 to December 1991, he served as
President of Dynamic Concepts, a cardiovascular distribution company,
representing Trimedyne, Telectronics, CryoLife and other high tech start-up
companies.
Blair W. Breyne joined the Company in January 1994 and has served as
Director of International Market Development for the Company since January 1995.
From January 1994 through December 1994, Ms. Breyne served as Manager of
International Market Development. Prior to joining the Company, Ms. Breyne was
employed by EndoSonics from May 1990 through December 1993 as Manager and
National Manager of Sales and Clinical Applications.
Robert J. Imdieke joined the Company as Manager of Quality Assurance in
January 1995. Prior to joining CVD Mr. Imdieke served as Manager, Quality
Assurance at Imagyn Medical, Inc. from June 1991 to January 1995. From December
1989 until February 1991, he served as Quality Control Supervisor at Advanced
Interventional Systems. Mr. Imdieke also served as Quality Assurance Manager at
Trimedyne, Inc. from November 1984 through May 1989.
Mitchell Dann joined the Company as a director in April 1996. Since April
1991, Mr. Dann has been a President of M. Dann & Co., Inc., a venture capital
advisory firm. From October 1982 to April 1991, he co-founded and held the
position of Managing Partner at IAI Venture Capital Group, the venture capital
division of Investment Advisors, Inc. Mr. Dann is Chairman of the Board of
Urologix, Inc.
William G. Davis joined the Company as a director in January 1995. Mr.
Davis is an independent business consultant. From 1957 to 1984, Mr. Davis was
associated with Eli Lilly and Company. He served as Executive Vice President,
Eli Lilly International Corporation, from 1972 to 1975, Executive Vice
President, Pharmaceutical Division, from 1975 to 1982, and President, Medical
Instrument Systems Division, from 1982 until his retirement in 1984. Mr. Davis
is also a director of ALZA Corporation, Collagen Corporation, EndoSonics and
Target Therapeutics, Inc.
Gerard von Hoffmann joined the Company as a director in April 1996. He has
been with the law firm of Knobbe, Martens, Olson & Bear since 1986 and has been
a partner since 1989.
Edward M. Leonard was appointed as a director in April 1996. He has been a
partner in the law firm of Brobeck, Phleger & Harrison LLP since 1977. Mr.
Leonard is a member of Brobeck's Policy Committee and founded and served as
Managing Partner of Brobeck's Palo Alto office from January 1980 through January
1996. He also served as head of Brobeck's Corporate Practice Group from 1988
through 1992. Mr. Leonard is also a director of EndoSonics.
37
<PAGE> 40
The Company currently has authorized five directors. Each director holds
office until the next annual meeting of stockholders or until his successor is
duly elected and qualified. The officers serve at the discretion of the Board of
Directors.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has established a Compensation Committee and an
Audit Committee. The Compensation Committee establishes salaries, incentives and
other forms of compensation for directors, officers and other employees of CVD,
administers the various incentive compensation and benefit plans (including the
Company's stock plans) of CVD and recommends policies relating to such incentive
compensation and benefit plans. The Audit Committee reviews the need for
internal auditing procedures and the adequacy of internal controls and meets
periodically with management and the independent auditors. The Board of
Directors may establish additional committees from time to time.
EXECUTIVE COMPENSATION
The following Summary Compensation Table sets forth the compensation earned
by the Company's Chief Executive Officer whose salary and bonus for 1995 was in
excess of $100,000 (the "Named Officer") for services rendered in all capacities
to the Company for that fiscal year. No other executive officer was paid salary
and bonus in excess of $100,000 for the 1995 fiscal year. No executive officer
who would have otherwise been includable in such table on the basis of salary
and bonus earned for 1995 resigned or terminated employment during that year.
See "Certain Transactions -- Relationship with EndoSonics Corporation."
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
-------------
NUMBER OF
ANNUAL COMPENSATION SECURITIES
-------------------- UNDERLYING
NAME AND PRESENT PRINCIPAL POSITION SALARY BONUS OPTIONS
- -------------------------------------------------------- -------- ------- -------------
<S> <C> <C> <C>
Michael R. Henson....................................... $189,850 $70,000 250,000
President and Chief Executive Officer
</TABLE>
38
<PAGE> 41
OPTION GRANTS IN LAST FISCAL YEAR
The following table contains information concerning the stock option grants
made to the Named Officer in 1995. No stock appreciation rights were granted to
this individual during such year.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
------------------------------------------------------------- VALUE AT ASSUMED
NUMBER OF ANNUAL RATES OF STOCK
SECURITIES PRICE APPRECIATION
UNDERLYING % OF TOTAL OPTIONS FOR
OPTIONS GRANTED TO EXERCISE OPTION TERM(4)
GRANTED EMPLOYEES IN PRICE EXPIRATION ---------------------
(#)(1) FISCAL YEAR(2) ($/SH)(3) DATE 5%($) 10%($)
---------- ------------------ ----------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Michael R. Henson......... 200,000(5) 20.90% $1.00 05/14/2005 $125,779 $318,748
50,000(6) 5.22 1.50 12/18/2005 47,167 119,531
</TABLE>
- ---------------
(1) Each of the options listed in the table was granted under the Company's 1995
Stock Option Plan. Each such option will be incorporated into the 1996 Stock
Option/Stock Issuance Plan.
(2) Based upon options granted for an aggregate of 957,000 shares to employees
in 1995, including the Named Officer.
(3) The exercise price may be paid in cash, in shares of the Company's Common
Stock valued at fair market value on the exercise date or through a cashless
exercise procedure involving a same-day sale of the purchased shares. The
Company may also finance the option exercise by loaning the optionee
sufficient funds to pay the exercise price for the purchased shares,
together with any federal and state income tax liability incurred by the
optionee in connection with such exercise. The Compensation Committee of the
Board of Directors, as the Plan Administrator of the Company's 1996 Stock
Option/Stock Issuance Plan, has the discretionary authority to reprice the
options through the cancellation of those options and the grant of
replacement options with an exercise price based on the fair market value of
the option shares on the grant date.
(4) The 5% and 10% assumed annual rates of compounded stock price appreciation
are mandated by rules of the Securities and Exchange Commission. There can
be no assurance provided to any executive officer or any other holder of the
Company's securities that the actual stock price appreciation over the
option term will be at the assumed 5% and 10% levels or at any other defined
level. Unless the market price of the Common Stock appreciates over the
option term, no value will be realized from the option grants made to the
executive officers.
(5) The option was granted on May 15, 1995 and has a maximum term of ten years
measured from the grant date, subject to earlier termination upon the
optionee's termination of service with the Company. Each option is
immediately exercisable subject to a repurchase right in favor of the
Company which lapses in a series of annual and monthly installments over the
optionee's period of service with the Company. The Company's repurchase
right lapses as to 25% of the option shares upon the optionee's completion
of one year of service measured from November 21, 1994 and as to the balance
of the option shares in a series of successive equal monthly installments
upon the optionee's completion of each additional month of service over the
next 36 months thereafter.
(6) The option was granted on December 19, 1995 and has a maximum term of ten
years measured from the grant date, subject to earlier termination upon the
optionee's termination of service with the Company. Each option is
immediately exercisable subject to a repurchase right in favor of the
Company which lapses in a series of annual and monthly installments over the
optionee's period of service with the Company. The Company's repurchase
right lapses as to 25% of the option shares upon the optionee's completion
of one year of service measured from the grant date and as to the balance of
the option shares in a series of successive equal monthly installments upon
the optionee's completion of each additional month of service over the next
36 months thereafter.
39
<PAGE> 42
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
The following table sets forth information concerning option exercises and
option holdings for 1995 with respect to the Named Officer. No stock
appreciation rights were exercised during such year or were outstanding at the
end of that year.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
OPTIONS AT FY-END(#)(1) FY-END(2)
----------------------------- -----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- --------------------------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Michael R. Henson............................ 54,167 195,833 $27,084 $72,916
</TABLE>
- ---------------
(1) Options are immediately exercisable for all the option shares, but any
shares purchased under the options will be subject to repurchase by the
Company at the original exercise price per share upon the optionee's
cessation of service. Shares subject to repurchase are shown under the
"Unexercisable" column.
(2) Based on the fair market value of the Company's Common Stock at year-end,
$1.50 per share (as determined by the Company's Board of Directors), less
the exercise price payable for such shares.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Company's Board was formed in May 1996,
and the members of the Compensation Committee are Messrs. Davis and Dann.
Neither of these individuals was at any time during the fiscal year ended
December 31, 1995, or at any other time, an officer or employee of the Company.
No member of the Compensation Committee of the Company serves as a member of the
board of directors or compensation committee of any entity that has one or more
executive officers serving as a member of the Company's Board of Directors or
Compensation Committee.
1996 STOCK OPTION/STOCK ISSUANCE PLAN
The Company's 1996 Stock Option/Stock Issuance Plan (the "1996 Plan") is
intended to serve as the successor equity incentive program to the Company's
1995 Stock Option Plan (the "Predecessor Plan"). The 1996 Plan was adopted by
the Board of Directors and approved by the stockholders on May 1, 1996, (the
"Effective Date"). Under the 1996 Plan, 1,200,000 shares of Common Stock have
been authorized for issuance. This share reserve is comprised of the shares
which remained available for issuance under the Predecessor Plan as of the
Effective Date, including the shares subject to outstanding options thereunder.
Those outstanding options will be incorporated into the 1996 Plan on the
Effective Date, and no further option grants will be made under the Predecessor
Plan. The incorporated options will continue to be governed by their existing
terms, unless the Plan Administrator elects to extend one or more features of
the 1996 Plan to those options. However, except as otherwise noted below, the
outstanding options under the Predecessor Plan contain substantially the same
terms and conditions specified below for the Discretionary Option Grant Program
in effect under the 1996 Plan. In no event may any one participant in the 1996
Plan receive option grants or direct stock issuances for more than 800,000
shares in the aggregate over the term of the Plan.
The 1996 Plan is divided into three separate components: (i) the
Discretionary Option Grant Program under which eligible individuals may, at the
discretion of the Plan Administrator, be granted options to purchase shares of
Common Stock at an exercise price not less than 85% of their fair market value
on the grant date, (ii) the Stock Issuance Program under which such individuals
may, in the Plan Administrator's discretion, be issued shares of Common Stock
directly, through the purchase of such shares at a price not less than 85% of
their fair market value at the time of issuance or as a bonus tied to the
performance of services and (iii) the Automatic Option Grant Program under which
option grants will automatically be made at periodic intervals to eligible
non-employee Board members to purchase shares of Common Stock at an exercise
price equal to 100% of their fair market value on the grant date.
The Discretionary Option Grant Program and the Stock Issuance Program will
be administered by the Compensation Committee. The Compensation Committee as
Plan Administrator will have complete discretion to determine which eligible
individuals are to receive option grants or stock issuances, the time or times
40
<PAGE> 43
when such option grants or stock issuances are to be made, the number of shares
subject to each such grant or issuance, the status of any granted option as
either an incentive stock option or a non-statutory stock option under the
Federal tax laws, the vesting schedule to be in effect for the option grant or
stock issuance and the maximum term for which any granted option is to remain
outstanding.
Under the 1996 Plan, upon an acquisition of the Company by merger or asset
sale or a hostile take-over of the Company, each outstanding option and unvested
stock issuance will be subject to accelerated vesting under certain
circumstances. The options granted under the Predecessor Plan will be assumed or
replaced in a merger or asset sale but do not include any acceleration
provisions in connection with a merger or asset-sale or upon a hostile
take-over, although such options may be accelerated at the discretion of the
Plan Administrator.
Stock appreciation rights are authorized for issuance under the
Discretionary Option Grant Program which provide the holders with the election
to surrender their outstanding options for an appreciation distribution from the
Company equal to the excess of (i) the fair market value of the vested shares of
Common Stock subject to the surrendered option over (ii) the aggregate exercise
price payable for such shares. Such appreciation distribution may be made in
cash or in shares of Common Stock. No stock appreciation rights exist with
respect to options currently outstanding under the Predecessor Plan.
The Plan Administrator has the authority to effect the cancellation of
outstanding options under the Discretionary Option Grant Program (including
options incorporated from the Predecessor Plan) in return for the grant of new
options for the same or different number of option shares with an exercise price
per share based upon the fair market value of the Common Stock on the new grant
date.
Under the Automatic Option Grant Program, each individual serving as a
non-employee Board member on the date the Underwriting Agreement for this
offering is executed will receive an option grant on such date for 5,000 shares
of Common Stock, provided such individual has not otherwise been in the prior
employ of the Company. Each individual who first becomes a non-employee Board
member thereafter will receive a 5,000-share option grant on the date such
individual joins the Board provided such individual has not been in the prior
employ of the Company. In addition, at each Annual Stockholders Meeting held
after the date of this offering, each individual who is to continue to serve as
a non-employee Board after the meeting will receive an additional option grant
to purchase 5,000 shares of Common Stock whether or not such individual has been
in the prior employ of the Company.
Each automatic grant will have a term of 10 years, subject to earlier
termination following the optionee's cessation of Board service. Each automatic
option will be immediately exercisable; however, any shares purchased upon
exercise of the option will be subject to repurchase should the optionee's
service as a non-employee Board member cease prior to vesting in the shares. The
initial 5,000-share grant will vest in four equal and successive annual
installments over the optionee's period of Board service. Each additional annual
5,000-share grant will vest upon the optionee's completion of one year of Board
service measured from the grant date. However, each outstanding option will
immediately vest upon (i) certain changes in the ownership or control of the
Company or (ii) the death or disability of the optionee while serving as a Board
member.
The Board may amend or modify the 1996 Plan at any time. The 1996 Plan will
terminate on April 30, 2006, unless sooner terminated by the Board.
EMPLOYEE STOCK PURCHASE PLAN
The Company's Employee Stock Purchase Plan (the "Purchase Plan") was
adopted by the Board of Directors and approved by the stockholders on May 1,
1996. The Purchase Plan is designed to allow eligible employees of the Company
and participating subsidiaries to purchase shares of Common Stock, at semi-
annual intervals, through their periodic payroll deductions under the Purchase
Plan, and a reserve of 200,000 shares of Common Stock has been established for
this purpose.
The Purchase Plan will be implemented in a series of successive offering
periods, each with a maximum duration of twenty-four months. The initial
offering period will begin on the day the Underwriting Agreement is executed
based on the initial public offering price and will end on the last business day
in July 1998. Each offering period will be comprised of successive purchase
intervals, each of a duration of six months. However,
41
<PAGE> 44
the first purchase interval under the initial offering period may be of a
duration in excess of six months. Shares of Common Stock will be purchased for
each participant at the end of each purchase interval during the offering
period. If the fair market value of the Common Stock on any purchase date in the
offering period is less than the fair market value of the Common Stock at the
start of the offering period, then that offering period will terminate and a new
offering period will automatically commence on the next business day following
that purchase date.
Payroll deductions may not exceed 10% of base salary for each purchase
interval. The purchase price per share will be 85% of the lower of (i) the fair
market value of the Common Stock on the participant's entry date into the
offering period or (ii) the fair market value on the semi-annual purchase date.
In no event may any participant purchase more than 950 shares of Common Stock on
any purchase date.
The Board may terminate the Purchase Plan at any time. The Purchase Plan
will terminate in all events on the last business day in July 2006.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company's Certificate of Incorporation limits the liability of
directors to the maximum extent permitted by Delaware law. Delaware law provides
that a director of a corporation will not be personally liable for monetary
damages for breach of such individual's fiduciary duties as a director except
for liability (i) for any breach of such director's duty of loyalty to the
corporation, (ii) for acts or omissions not in good faith or that involve
intentional misconduct or a knowing violation of law, (iii) for unlawful
payments of dividends or unlawful stock repurchases or redemptions as provided
in Section 174 of the Delaware General Corporation Law, or (iv) for any
transaction from which a director derives an improper personal benefit.
The Company's Bylaws provide that the Company will indemnify its directors
and may indemnify its officers, employees and other agents to the full extent
permitted by law. The Company believes that indemnification under its Bylaws
covers at least negligence and gross negligence on the part of an indemnified
party and permits the Company to advance expenses incurred by an indemnified
party in connection with the defense of any action or proceeding arising out of
such party's status or service as a director, officer, employee or other agent
of the Company upon an undertaking by such party to repay such advances if it is
ultimately determined that such party is not entitled to indemnification.
The Company has entered into separate indemnification agreements with each
of its directors. These agreements require the Company, among other things, to
indemnify such director against expenses (including attorneys's fees),
judgments, fines and settlements (collectively, "Liabilities") paid by such
individual in connection with any action, suit or proceeding arising out of such
individual's status or service as a director of the Company (other than
Liabilities arising from willful misconduct or conduct that is knowingly
fraudulent or deliberately dishonest) and to advance expenses incurred by such
individual in connection with any proceeding against such individual with
respect to which such individual may be entitled to indemnification by the
Company.
The Company believes that its Certificate of Incorporation and Bylaw
provisions and indemnification agreements are necessary to attract and retain
qualified persons as directors and officers. At present the Company is not aware
of any pending litigation or proceeding involving any director, officer,
employee or agent of the Company where indemnification will be required or
permitted. The Company is not aware of any threatened litigation or proceeding
that might result in a claim for such indemnification.
EMPLOYMENT CONTRACTS AND CHANGE OF CONTROL ARRANGEMENTS
The Company does not presently have any employment contracts in effect with
any of its executive officers.
The Compensation Committee as Plan Administrator of the 1996 Plan will have
the authority to provide for the accelerated vesting of the shares of Common
Stock subject to outstanding options held by the Chief Executive Officer and any
other executive officer or the shares of Common Stock subject to direct
issuances held by such individual, in connection with certain changes in control
of the Company or the subsequent termination of the officer's employment
following the change in control event.
42
<PAGE> 45
CERTAIN TRANSACTIONS
RELATIONSHIP WITH ENDOSONICS CORPORATION
On June 15, 1992, EndoSonics acquired a 40% interest in CVD in exchange for
$568,000 in cash. Upon completion of this investment, EndoSonics' President and
Chief Executive Officer owned a 19% equity interest in CVD and served as
Chairman of the Board. Pursuant to an Agreement and Plan of Reorganization
between EndoSonics and CVD signed on June 9, 1993, EndoSonics acquired all of
the outstanding capital stock of CVD in exchange for $335,000 in cash and
250,000 shares of EndoSonics' Common Stock with an aggregate market value of
$1,563,000. Pursuant to the terms of the Agreement and Plan of Reorganization,
in June 1995, EndoSonics became obligated to issue 50,000 shares of its Common
Stock with an aggregate market value of $488,000, to the former shareholders of
CVD because the market price of EndoSonics' stock did not exceed a specified
price for a specified period during the two-year period following the
acquisition. On March 29, 1996, EndoSonics acquired 400,000 shares of Series B
Preferred Stock for a purchase price of $8,000,000, which will convert into
800,000 shares of Common Stock upon the consummation of this offering.
During 1994 and 1995, EndoSonics manufactured certain of the Company's
catheter products. Total purchases from EndoSonics during 1994 and 1995 amounted
to $0.8 million and $0.2 million, respectively. In addition, during 1994
EndoSonics performed certain billing and collection services for the Company in
return for a fee per invoice which amounted to $10,000. In addition, since
August 1993, certain of EndoSonics' corporate expenses, including Mr. Henson's
salary, were paid by EndoSonics and accounting, cash management and other
administrative services were performed by EndoSonics. Pursuant to this
arrangement, the Company paid EndoSonics an aggregate of $290,000, $340,000,
$54,000 and $48,000 for 1993, 1994, 1995 and the three months ended March 31,
1996, respectively. In addition, EndoSonics paid Mr. Henson's bonus for 1995.
See "Management -- Executive Compensation."
The Company has entered into a license agreement with EndoSonics, dated
December 22, 1995 (the "EndoSonics Agreement"), pursuant to which CVD granted
EndoSonics the non-exclusive, royalty-free right to CVD's FOCAL technology for
the development and sale of a combined FOCAL/Ultrasound product. In exchange,
CVD received the non-exclusive, royalty-free right to submit PMA supplement
applications utilizing an EndoSonics PMA as a reference and to manufacture and
distribute CVD products as a supplement to the EndoSonics PMA. The EndoSonics
Agreement may be terminated in the event of breach upon 60 days notice by the
non-breaching party, subject to the breaching party's right to cure. In
addition, EndoSonics recently purchased 400,000 shares of CVD's Series B
Preferred Stock for a purchase price of $8,000,000, which will convert into
800,000 shares of Common Stock upon the consummation of this offering.
CVD and EndoSonics will enter into certain agreements for the purpose of
defining the ongoing relationship between the two companies. EndoSonics owned
approximately 84% of the outstanding voting capital stock of CVD prior to the
offering made hereby and will own approximately 49% of CVD's Common Stock after
the offering. Accordingly, these agreements are not the result of arm's-length
negotiations between independent parties.
Prior to the completion of this offering, CVD and EndoSonics will enter
into a Tax Allocation Agreement that will provide, among other things, for (i)
the allocation of tax liabilities and adjustments thereto as between the
business of the Company and other businesses conducted by EndoSonics and its
affiliates related to periods in which the Company is includable in consolidated
federal income tax returns filed by EndoSonics, (ii) the allocation of
responsibility for filing tax returns and (iii) the conduct of and
responsibility for taxes owed in connection with tax audits and various related
matters, as described below.
EndoSonics will agree to indemnify CVD for any federal and state income tax
liability arising out of any audit with respect to periods ending prior to the
closing of the offering hereby and for which CVD was included in EndoSonics'
consolidated federal income tax return or a state unitary or combined return. In
addition, with respect to periods for which CVD is included in EndoSonics'
federal consolidated or state unitary tax return, EndoSonics shall control the
filing of such returns and the conduct of any audits thereof. With respect to
periods following the closing of this offering, the Company will file its own
federal income tax return and will not be included in EndoSonics' federal
return. The Company will initially be included in
43
<PAGE> 46
certain unitary or combined returns for state tax purposes. To the extent this
occurs, this agreement generally will treat the Company as a separate taxpayer
and will charge the Company with its separate tax return liability.
EndoSonics and CVD will enter into a Stockholder Agreement providing that
all transactions between the Company and EndoSonics or any affiliate of
EndoSonics must be approved by a special committee of CVD's Board of Directors
comprised of two directors who are not officers, directors, employees or
affiliates of EndoSonics. The members of this committee are Mitchell Dann and
Gerard von Hoffmann. No transactions between the Company and EndoSonics are
currently contemplated. During the effective term of the Agreement, EndoSonics
may not vote to eliminate from the Company's Certificate of Incorporation
provisions requiring cumulative voting for the election of directors. The
provisions of the Agreement become effective upon the consummation of the
offering made hereby and terminate on the earlier of seven years from the date
of the Agreement or on the date EndoSonics beneficially owns less than 25% of
CVD's Common Stock.
EndoSonics has informed the Company that EndoSonics presently intends to
distribute or otherwise transfer to EndoSonics stockholders a portion of the CVD
shares it will hold on consummation of this offering. While EndoSonics indicated
that it may so distribute or transfer up to a majority of the shares it will
hold, it also indicated that the precise amount and timing of any such
distribution or transfer will depend upon, among other matters, an analysis of
the tax consequences to EndoSonics and its stockholders. Any such distribution
or transfer may result in a change of control of CVD. Notwithstanding
EndoSonics' stated intent, EndoSonics is not obligated to make any such
distribution or transfer nor is it obligated to take any action or refrain from
taking any action with respect to the shares of CVD which it will hold upon
completion of this offering.
OTHER TRANSACTIONS
On September 10, 1994, the Company entered into a Stock Purchase and
Technology License Agreement with SCIMED (the "SCIMED Agreement"). Pursuant to
the SCIMED Agreement, SCIMED purchased a 19% equity position in the Company for
a purchase price of $2,500,000. SCIMED was also granted an exclusive worldwide
license to certain site-specific drug delivery/PTCA technology for use in the
cardiovascular field in exchange for license and royalty fees. The SCIMED
Agreement also requires CVD to provide certain technical assistance and to
perform additional research and development relating to the licensed technology
in exchange for fees and reimbursement of expenses, respectively. In the event
that CVD's SCIMED-funded research and development efforts result in improvements
to the licensed technology, SCIMED will have an exclusive worldwide license to
the technology in the cardiovascular field and a non-exclusive license outside
the cardiovascular field, both of which are subject to the payment of royalties.
The SCIMED Agreement may be terminated in the event of breach on 90 days notice
by the non-breaching party (or on 30 days notice in certain limited
circumstances) or by SCIMED upon 180 days notice.
In connection with the adoption of the Predecessor Plan, the Company issued
a warrant to SCIMED in June 1995 to purchase 40,000 shares of Series A Preferred
Stock at an exercise price of $6.58 per share in exchange for a waiver of
SCIMED's anti-dilution rights under the SCIMED Agreement. The Company
subsequently issued a warrant for an additional 20,000 shares of Series A
Preferred at $6.58 per share in connection with an increase in the number of
shares reserved for issuance under the Predecessor Plan. Following the
consummation of this offering, these warrants shall be exercisable for 80,000
shares of Common Stock and 40,000 shares of Common Stock, respectively, at an
exercise price of $3.29 per share.
EndoSonics and SCIMED have entered into lock-up agreements with the Company
limiting sales of the Company's Common Stock during the 180-day period following
the date of this Prospectus. See "Shares Eligible for Future Sale."
CVD intends to extend a loan in the amount of $150,000, to Jeffrey F.
O'Donnell, the Company's Vice President of Sales and Marketing. The note, which
will be secured by a second deed of trust on Mr. O'Donnell's home, will have a
five-year term with interest compounding semi-annually at 6%. The principal and
interest will be due five years from the date of the note.
44
<PAGE> 47
The Company believes that all of the transactions set forth above were made
on terms no less favorable to the Company than could have been obtained from
unaffiliated third parties. All future transactions, including loans, between
the Company and its officers, directors, principal stockholders and their
affiliates will be approved by a majority of the Board of Directors, including a
majority of the independent and disinterested outside directors on the Board of
Directors, and will continue to be on terms no less favorable to the Company
than could be obtained from unaffiliated third parties.
45
<PAGE> 48
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of March 31, 1996 (after giving
effect to the conversion of all outstanding shares of the Company's Preferred
Stock into Common Stock upon the closing of this offering), and as adjusted to
reflect the 2-for-1 stock split of the Company's Common Stock immediately prior
to the effectiveness of this offering and the sale of the shares offered hereby
by (i) each person who is known by the Company to own beneficially more than
five percent of the Company's Common Stock, (ii) each of the Company's
directors, (iii) the Named Officer, (iv) certain executive officers and (v) all
current officers and directors as a group.
<TABLE>
<CAPTION>
PERCENT BENEFICIALLY
SHARES OWNED(1)(2)(3)
BENEFICIALLY ---------------------
OWNED(1)(2) BEFORE AFTER
NAME NUMBER OFFERING OFFERING
----------------------------------------------------- ------------ -------- --------
<S> <C> <C> <C>
EndoSonics Corporation............................... 4,040,000 84.17% 48.90%
6616 Owens Drive
Pleasanton, CA 94588
SCIMED Life Systems, Inc.(4)......................... 880,000 17.89 10.65
One SCIMED Place
Maple Grove, MN 55311
Michael R. Henson(5)................................. 250,000 4.95 3.03
Mitchell Dann(6)..................................... -- -- --
William G. Davis(7).................................. 6,000 * *
Gerard von Hoffmann(8)............................... -- -- --
Edward M. Leonard(9)................................. -- -- --
Michael D. Crocker(10)............................... 100,000 2.08 1.21
Dana P. Nickell(11).................................. 56,000 1.17 *
Jeffrey F. O'Donnell(12)............................. 100,000 2.08 1.21
All directors and officers as a group (13
persons)(13)....................................... 658,000 12.06% 7.96%
</TABLE>
- ---------------
* Represents beneficial ownership of less than 1%.
(1) Except as indicated in the footnotes to this table and pursuant to
applicable community property laws, the persons named in the table have
sole voting and investment power with respect to all shares of Common
Stock.
(2) The number of shares of Common Stock beneficially owned includes any shares
issuable pursuant to stock options that may be exercised within 60 days
after March 31, 1996. All options are immediately exercisable subject to a
repurchase right in favor of the Company. Shares issuable pursuant to such
options are deemed outstanding for computing the percentage of the person
holding such options but are not deemed to be outstanding for computing the
percentage of any other person.
(3) The number of shares of Common Stock outstanding after this offering
includes the 3,400,000 shares of Common Stock being offered for sale by the
company in this offering and the issuance of 62,500 shares of Common Stock
to Fukuda pursuant to the terms of the Amendment to Japanese Distribution
Agreements dated May 13, 1996 by and between CVD and Fukuda. The number of
shares of Common Stock outstanding after this offering assumes no exercise
of the Underwriters' over-allotment option. See "Underwriting."
(4) Includes warrants to purchase 120,000 shares of the Company's Common Stock.
(5) Includes options to purchase 250,000 shares of the Company's Common Stock.
(6) Mr. Dann will receive an option to purchase 5,000 shares of Common Stock on
the date the Underwriting Agreement for this offering is executed.
(7) Includes options to purchase 6,000 shares of the Company's Common Stock.
Mr. Davis will receive an option to purchase 5,000 shares of Common Stock
on the date the Underwriting Agreement for this offering is executed.
(8) Mr. von Hoffman will receive an option to purchase 5,000 shares of Common
Stock on the date the Underwriting Agreement for this offering is executed.
(9) Mr. Leonard will receive an option to purchase 5,000 shares of Common Stock
on the date the Underwriting Agreement for this offering is executed.
(10) Includes options to purchase 100,000 shares of the Company's Common Stock.
(11) Includes options to purchase 56,000 shares of the Company's Common Stock.
(12) Includes options to purchase 100,000 shares of the Company's Common Stock.
(13) Includes options to purchase 658,000 shares of the Company's Common Stock.
46
<PAGE> 49
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 30,000,000 shares
of Common Stock, $.001 par value, and 5,000,000 shares of Preferred Stock, $.001
par value, after giving effect to the amendment of the Company's Certificate of
Incorporation to delete references to Series A Preferred Stock and Series B
Preferred Stock following conversion of such Preferred Stock into Common Stock
upon the closing of this offering.
COMMON STOCK
As of March 31, 1996, there were 4,800,000 shares of Common Stock
outstanding that were held of record by 2 stockholders. There will be 8,262,500
shares of Common Stock outstanding (assuming no exercise of the Underwriters'
overallotment option and assuming no exercise of options after March 31, 1996)
after giving effect to the sale of the shares of Common Stock to the public
offered hereby and the conversion of the Convertible Obligation and the
Company's Series A Preferred Stock and Series B Preferred Stock into Common
Stock.
The holders of Common Stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. Subject to preferences that may be
applicable to any outstanding Preferred Stock, the holders of Common Stock are
entitled to receive ratably such dividends, if any, as may be declared from time
to time by the Board of Directors out of funds legally available therefore. See
"Dividend Policy." In the event of the liquidation, dissolution or winding up of
the Company, the holders of Common Stock are entitled to share ratably in all
assets remaining after payment of liabilities, subject to prior distribution
rights of Preferred Stock, if any, then outstanding. The Common Stock has no
preemptive or conversion rights or other subscription rights. There are no
redemption or sinking fund provisions applicable to the Common Stock. All
outstanding shares of Common Stock are fully paid and nonassessable, and the
shares of Common Stock to be issued upon completion of this offering will be
fully paid and nonassessable.
PREFERRED STOCK
The Company's Certificate of Incorporation authorizes 5,000,000 shares of
Preferred Stock. The Board of Directors has the authority to issue the Preferred
Stock in one or more series and to fix the rights, preferences, privileges and
restrictions thereof, including dividend rights, dividend rates, conversion
rights, voting rights, terms of redemption, redemption prices, liquidation
preferences and the number of shares constituting any series or the designation
of such series, without further vote or action by the stockholders. The issuance
of Preferred Stock may have the effect of delaying, deferring or preventing a
change in control of the Company without further action by the stockholders and
may adversely affect the voting and other rights of the holders of Common Stock.
The issuance of Preferred Stock with voting and conversion rights may adversely
affect the voting power of the holders of Common Stock, including the loss of
voting control to others. At present, the Company has no plans to issue any of
the Preferred Stock.
ANTITAKEOVER EFFECTS OF PROVISIONS OF THE CERTIFICATE OF INCORPORATION, BYLAWS
AND DELAWARE LAW
Certificate of Incorporation and Bylaws
The Certificate of Incorporation provides that, effective upon the closing
of this offering, all stockholder actions must be effected at a duly called
meeting and not by a consent in writing. The Bylaws provide that the Company's
stockholders may call a special meeting of stockholders only upon a request of
stockholders owning at least 50% of the Company's capital stock. These
provisions of the Certificate of Incorporation and Bylaws could discourage
potential acquisition proposals and could delay or prevent a change in control
of the Company. These provisions are intended to enhance the likelihood of
continuity and stability in the composition of the Board of Directors and in the
policies formulated by the Board of Directors and to discourage certain types of
transactions that may involve an actual or threatened change of control of the
Company. These provisions are designed to reduce the vulnerability of the
Company to an unsolicited acquisition proposal. The provisions also are intended
to discourage certain tactics that may be used in proxy fights. However, such
provisions could have the effect of discouraging others from making tender
offers for the Company's shares and, as a consequence, they also may inhibit
fluctuations in the market price of the Company's shares that could result from
actual or rumored takeover attempts. Such provisions also may have
47
<PAGE> 50
the effect of preventing changes in the management of the Company. See "Risk
Factors -- Effect of Certain Charter Provisions; Antitakeover Effects of
Certificate of Incorporation, Bylaws and Delaware Law."
Delaware Takeover Statute
The Company is subject to Section 203 of the Delaware General Corporation
Law ("Section 203"), which, subject to certain exceptions, prohibits a Delaware
corporation from engaging in any business combination with any interested
stockholder for a period of three years following the date that such stockholder
became an interested stockholder, unless: (i) prior to such date, the board of
directors of the corporation approved either the business combination or the
transaction that resulted in the stockholder becoming an interested stockholder;
(ii) upon consummation of the transaction that resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at least
85% of the voting stock of the corporation outstanding at the time the
transaction commenced, excluding for purposes of determining the number of
shares outstanding those shares owned (x) by persons who are directors and also
officers and (y) by employee stock plans in which employee participants do not
have the right to determine confidentially whether shares held subject to the
plan will be tendered in a tender or exchange offer; or (iii) on or subsequent
to such date, the business combination is approved by the board of directors and
authorized at an annual or special meeting of stockholders, and not by written
consent, by the affirmative vote of at least 66 2/3% of the outstanding voting
stock that is not owned by the interested stockholder.
Section 203 defines business combination to include: (i) any merger or
consolidation involving the corporation and the interested stockholder; (ii) any
sale, transfer, pledge or other disposition of 10% or more of the assets of the
corporation involving the interested stockholder; (iii) subject to certain
exceptions, any transaction that results in the issuance or transfer by the
corporation of any stock of the corporation to the interested stockholder; (iv)
any transaction involving the corporation that has the effect of increasing the
proportionate share of the stock of any class or series of the corporation
beneficially owned by the interested stockholder; or (v) the receipt by the
interested stockholder of the benefit of any loans, advances, guarantees,
pledges or other financial benefits provided by or through the corporation. In
general, Section 203 defines an interested stockholder as any entity or person
beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by such entity or person.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is Chemical Mellon
Shareholder Services. Its address is 50 California Street, 10th Floor, San
Francisco, CA 94111, and its telephone number is (415) 954-9529.
48
<PAGE> 51
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have 8,262,500 shares of
Common Stock outstanding (assuming no exercise of options after March 31, 1996
and the conversion of the Convertible Obligation. Of these shares, the 3,400,000
shares sold in this offering will be freely tradeable without restriction or
further registration under the Securities Act, except that any shares purchased
by "affiliates" of the Company, as that term is defined under the Securities Act
("Affiliates"), may generally only be sold in compliance with the limitations of
Rule 144 described below.
SALES OF RESTRICTED SHARES
The remaining 4,862,500 shares of Common Stock are deemed "Restricted
Shares" under Rule 144. The number of shares of Common Stock available for sale
in the public market is limited by restrictions under the Securities Act and
lock-up agreements under which the holders of such shares have agreed not to
sell or otherwise dispose of any of their shares for a period of 180 days after
the date of this Prospectus without the prior written consent of the
Representatives of the Underwriters. On the date of this Prospectus, no shares
other than the 3,400,000 shares offered hereby will be eligible for sale.
Beginning 180 days after the date of this Prospectus (or earlier with the
consent of the Representatives of the Underwriters), 4,000,000 Restricted Shares
will become available for sale in the public market subject to certain
limitations of Rule 144 of the Securities Act. In addition, the Company intends
to register on a registration statement on Form S-8, approximately 30 days after
the effective date of this offering, a total of 200,000 shares of Common Stock
reserved for issuance under the Company's Employee Stock Purchase Plan and a
total of 1,200,000 shares of Common Stock subject to outstanding options or
reserved for issuance under the Company's 1996 Stock Option/Stock Issuance Plan.
See "Certain Transactions -- Relationship with EndoSonics Corporation" and "Risk
Factors -- Control by Existing Stockholder; Limitations on Pooling-of-Interests
Accounting" for a discussion of possible distributions of CVD shares held by
EndoSonics to EndoSonics' stockholders.
In general, under Rule 144 of the Securities Act as currently in effect,
beginning 90 days after this offering, a person (or persons whose shares are
aggregated) who has beneficially owned "restricted" shares for at least two
years, including a person who may be deemed an Affiliate of the Company, is
entitled to sell within any three-month period a number of shares of Common
Stock that does not exceed the greater of 1% of the then-outstanding shares of
Common Stock of the Company (approximately 82,625 shares after giving effect to
this offering) and the average weekly trading volume of the Common Stock on the
Nasdaq National Market during the four calendar weeks preceding such sale. Sales
under Rule 144 of the Securities Act are subject to certain restrictions
relating to manner of sale, notice and the availability of current public
information about the Company. A person who is not an Affiliate of the Company
at any time during the ninety days preceding a sale, and who has beneficially
owned shares for at least three years, would be entitled to sell such shares
immediately following this offering without regard to the volume limitations,
manner of sale provisions or notice or other requirements of Rule 144 of the
Securities Act. However, the transfer agent may require an opinion of counsel
that a proposed sale of shares comes within the terms of Rule 144 of the
Securities Act prior to effecting a transfer of such shares.
Prior to this offering, there has been no public market for the Common
Stock of the Company and no predictions can be made of the effect, if any, that
the sale or availability for sale of shares of additional Common Stock will have
on the market price of the Common Stock. Nevertheless, sales of substantial
amounts of such shares in the public market, or the perception that such sales
could occur, could adversely affect the market price of the Common Stock and
could impair the Company's future ability to raise capital through an offering
of its equity securities.
OPTIONS
As of March 31, 1996, options to purchase a total of 977,000 shares of
Common Stock pursuant to the 1995 Stock Option Plan were outstanding and
exercisable. All of the shares subject to options are subject to Lock-up
Agreements. See "-- Lock-up Agreements." An additional 223,000 shares of Common
Stock were available as of May 1, 1996 for future option grants or direct
issuances under the 1996 Stock Option/Stock Issuance Plan. See
"Management -- 1996 Stock Option/Stock Issuance Plan," and Notes 9 and 11 of
Notes to Financial Statements.
49
<PAGE> 52
Rule 701 under the Securities Act provides that shares of Common Stock
acquired on the exercise of outstanding options may be resold by persons other
than Affiliates, beginning 90 days after the date of this Prospectus, subject
only to the manner of sale provisions of Rule 144, and by Affiliates, beginning
90 days after the date of this Prospectus, subject to all provisions of Rule 144
except its two-year minimum holding period. The Company intends to file one or
more registration statements on Form S-8 under the Securities Act to register
all shares of Common Stock subject to outstanding stock options and Common Stock
issued or issuable pursuant to the Company's 1996 Stock Option/Stock Issuance
Plan and Common Stock issuable pursuant to the Company's Employee Stock Purchase
Plan. The Company expects to file the registration statements covering shares
issuable pursuant to the Employee Stock Purchase Plan and 1996 Stock
Option/Stock Issuance Plan approximately 30 days after the closing of this
offering. Such registration statements are expected to become effective upon
filing. Shares covered by these registration statements will thereupon be
eligible for sale in the public markets, subject to the Lock-up Agreements, if
applicable.
LOCK-UP AGREEMENTS
Each of the Company's directors and officers and each stockholder of the
Company has agreed that they will not, without the prior written consent of the
Representatives of the Underwriters, offer, sell, contract to sell or otherwise
dispose of any shares of Common Stock beneficially owned by them or any shares
issuable upon exercise of stock options for a period of 180 days from the
effective date of this offering. See "Underwriting."
REGISTRATION RIGHTS
After this offering, SCIMED, the holder of 760,000 shares of Common Stock
will be entitled upon expiration of a lock-up agreement with the Underwriters to
certain rights with respect to the registration of such shares under the
Securities Act. Under the terms of the agreement between the Company and SCIMED,
if the Company proposes to register any of its securities under the Securities
Act, either for its own account or for the account of other security holders
exercising registration rights, SCIMED is entitled to notice of such
registration and is entitled to include shares of such Common Stock therein.
SCIMED may also require the Company to file a registration statement under the
Securities Act at the Company's expense with respect to its shares of Common
Stock, and the Company is required to use its diligent reasonable efforts to
effect such registration. Further, SCIMED may require the Company to file
additional registration statements on Form S-3 at the Company's expense. These
rights are subject to certain conditions and limitations, among them the right
of the underwriters of an offering to limit the number of shares included in
such registration in certain circumstances.
50
<PAGE> 53
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Company has agreed to sell to each of the underwriters named below (the
"Underwriters"), and each of such Underwriters, for whom Volpe, Welty & Company,
Wessels, Arnold & Henderson, L.L.C. and Vector Securities International, Inc.
(together, the "Representatives") are acting as representatives, has agreed
severally to purchase from the Company, the respective number of shares of
Common Stock set forth opposite its name below. The Underwriters are committed
to purchase and pay for all shares if any shares are purchased.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
---------------------------------------------------------------- ----------
<S> <C>
Volpe, Welty & Company..........................................
Wessels, Arnold & Henderson, L.L.C..............................
Vector Securities International, Inc............................
---------
Total................................................. 3,400,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent, including the absence
of any material adverse change in the Company's business and the receipt of
certain certificates, opinions and letters from the Company and its counsel and
independent auditors. The nature of the Underwriters' obligations is such that
they are committed to purchase all shares of Common Stock offered hereby if any
of such shares are purchased.
The Representatives have advised the Company that the Underwriters propose
to offer the shares of Common Stock to the public at the offering price set
forth on the cover page of this Prospectus and to certain dealers at such price
less a concession of not in excess of $ per share, of which $ may be
reallocated to other dealers. After the Offering, the public offering price,
concession and reallowance to dealers may be reduced by the Representatives. No
such reduction shall change the amount of proceeds to be received by the Company
as set forth on the cover page of this Prospectus.
The Company has granted the Underwriters an option for thirty days after
the date of this Prospectus to purchase, at the offering price, less the
underwriting discounts and commissions as set forth on the cover page of this
Prospectus, up to 510,000 additional shares of Common Stock at the same price
per share as the Company receives for the 3,400,000 shares of Common Stock
offered hereby, solely to cover over-allotments, if any. If the Underwriters
exercise their over-allotment option, the Underwriters have severally agreed,
subject to certain conditions, to purchase approximately the same percentage
thereof that the number of shares of Common Stock to be purchased by each of
them, as shown in the foregoing table, bears to the 3,400,000 shares of Common
Stock offered hereby. The Underwriters may exercise such option only to cover
the over-allotments in connection with the sale of the 3,400,000 shares of
Common Stock offered hereby.
Each of the Company's directors and officers and each stockholder of the
Company, has agreed not to offer, sell, contract to sell or otherwise dispose of
Common Stock or securities convertible into or exchangeable for, or any rights
to purchase or acquire, Common Stock for a period of 180 days following the
Effective Date, without the prior written consent of Volpe, Welty & Company. The
Company also has agreed not to offer, sell,
51
<PAGE> 54
contract to sell or otherwise dispose of any shares of Common Stock or any
securities convertible into or exchangeable for, or any rights to purchase or
acquire, Common Stock for a period of 180 days following the date of this
Prospectus without the prior written consent of Volpe, Welty & Company, except
for the granting of options or the sale of stock pursuant to the Company's
existing stock and option plans. Volpe, Welty & Company, in its discretion, may
waive the foregoing restrictions in whole or in part, with or without a public
announcement of such action.
The offering of the shares is made for delivery when, as and if accepted by
the Underwriters and subject to prior sale and to withdrawal, cancellation or
modification of the offering without notice. The Underwriters reserve the right
to reject an order for the purchase of shares in whole or in part.
Prior to this offering, there has been no public market for the Company's
Common Stock. The initial public offering price of the Common Stock will be
determined by negotiations between the Company and the Representatives. Among
the factors considered in determining the initial public offering price of the
Common Stock, in addition to prevailing market conditions will be the Company's
historical performance, estimates of the business potential and earnings
prospects of the Company, an assessment of the Company's management and the
consideration of the above factors in relation to market valuations of companies
in related business.
The Company has agreed to indemnify the Underwriters against certain
liabilities that may be incurred in connection with this offering, including
liabilities under the Securities Act, or to contribute payments that the
Underwriters may be required to make in respect thereof.
LEGAL MATTERS
The validity of the issuance of the shares of Common Stock offered hereby
will be passed upon for the Company by Brobeck, Phleger & Harrison LLP, Palo
Alto, California. As of the date of this Prospectus, Edward M. Leonard, a member
of the firm of Brobeck, Phleger & Harrison LLP is a director of the Company and
will receive an option to purchase 5,000 shares of Common Stock on the date the
Underwriting Agreement for this offering is executed. Certain legal matters in
connection with this offering will be passed upon for the Underwriters by Wilson
Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto, California.
EXPERTS
The financial statements of CardioVascular Dynamics, Inc. at December 31,
1994 and 1995, and for each of the two years in the period ended December 31,
1995, and the period from June 10, 1993 to December 31, 1993 and of the
predecessor company for the period from January 1, 1993 through June 9, 1993,
appearing in this Prospectus and Registration Statement have been audited by
Ernst & Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein, and are included in reliance upon such report given
upon the authority of such firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission,
Washington, D.C. 20549, a Registration Statement on Form S-1 under the
Securities Act with respect to the Common Stock offered hereby. This Prospectus
does not contain all of the information set forth in the Registration Statement
and the exhibits and schedules to the Registration Statement. For further
information with respect to the Company and such Common Stock offered hereby,
reference is made to the Registration Statement and the exhibits and schedules
filed as a part of the Registration Statement. Statements contained in this
Prospectus concerning the contents of any contract or any other document
referred to are not necessarily complete; reference is made in each instance to
the copy of such contract or document filed as an exhibit to the Registration
Statement. Each such statement is qualified in all respects by such reference to
such exhibit. The Registration Statement, including exhibits and schedules
thereto, may be inspected without charge at the Securities and Exchange
Commission's principal office in Washington, D.C., and copies of all or any part
thereof may be obtained from such office after payment of fees prescribed by the
Securities and Exchange Commission.
52
<PAGE> 55
CARDIOVASCULAR DYNAMICS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors..................................... F-2
Balance Sheets........................................................................ F-3
Statements of Operations.............................................................. F-4
Statements of Stockholders' Equity (Net Capital Deficiency)........................... F-5
Statements of Cash Flows.............................................................. F-6
Notes to Financial Statements......................................................... F-7
</TABLE>
F-1
<PAGE> 56
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
CardioVascular Dynamics, Inc.
We have audited the accompanying balance sheets of CardioVascular Dynamics,
Inc. (a subsidiary of EndoSonics Corporation) as of December 31, 1994 and 1995,
and the related statements of operations, stockholders' equity (net capital
deficiency) and cash flows for the period from June 10, 1993 to December 31,
1993 and the years ended December 31, 1994 and 1995, and the statements of
operations, stockholders' equity and cash flows of the predecessor company for
the period from January 1, 1993 through June 9, 1993. 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 audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of CardioVascular Dynamics,
Inc. at December 31, 1994 and 1995, and the results of its operations and its
cash flows for the period from June 10, 1993 to December 31, 1993 and the years
ended December 31, 1994 and 1995 and the results of operations and cash flows of
the predecessor company for the period from January 1, 1993 through June 9,
1993, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
Palo Alto, California
March 15, 1996, except for Note 11,
as to which the date is
May 13, 1996
F-2
<PAGE> 57
CARDIOVASCULAR DYNAMICS, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION> PRO FORMA
STOCKHOLDERS'
DECEMBER 31, EQUITY
------------------ MARCH 31, MARCH 31,
1994 1995 1996 1996
------ ------- ----------- -----------
(UNAUDITED) (UNAUDITED)
(NOTE 11)
<S> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash............................................... $3,379 $ 1,568 $ 8,655
Accounts receivable, net of allowance for doubtful
accounts of $85, $180 and $180, respectively.... 727 1,117 1,584
Accounts receivable from related parties........... 125 -- 100
Inventories........................................ 50 754 752
Other current assets............................... 4 58 59
------ ------- -------
Total current assets................................. 4,285 3,497 11,150
Furniture and equipment.............................. 87 357 459
Leasehold improvements............................... 1 174 218
------ ------- -------
88 531 677
Less accumulated depreciation and amortization....... (33) (107) (152)
------ ------- -------
Furniture, fixtures and equipment, net............... 55 424 525
Other assets......................................... -- 81 95
------ ------- -------
Total assets......................................... $4,340 $ 4,002 $11,770
====== ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY (NET CAPITAL
DEFICIENCY)
Current liabilities:
Accounts payable and accrued expenses.............. $ 315 $ 1,684 $ 1,769
Payable to Parent.................................. 2,554 2,537 2,583
Deferred distributorship fee revenue, current
portion......................................... 50 50 50
------ ------- ------
Total current liabilities............................ 2,919 4,271 4,402
Deferred distributorship fee revenue................. 133 79 67
Convertible obligation............................... -- 750 750
Commitments
Stockholders' equity (net capital deficiency):
Convertible Preferred Stock, $.001 par value;
7,560,000 shares authorized, 2,000,000 and
2,400,000 shares issued and outstanding as of
December 31, 1995 and March 31, 1996,
respectively; none issued and outstanding at
December 31, 1994 and pro forma; aggregate
liquidation preference of $13,160,000 and
$21,160,000 as of December 31, 1995 and March
31, 1996, respectively.......................... -- 2 2 $ --
Common Stock, $.001 par value; 30,000,000 shares
authorized, 4,000,000 shares issued and
outstanding at December 31, 1994; no shares
issued or outstanding at December 31, 1995 or at
March 31, 1996; 4,862,500 shares issued and
outstanding pro forma........................... 4 -- -- 5
Additional paid-in capital......................... 4,835 5,670 13,720 14,467
Deferred compensation.............................. -- (345) (369) (369)
Accumulated deficit................................ (3,551) (6,425) (6,802) (6,802)
------ ------- ------ -------
Total stockholders' equity (net capital
deficiency)........................................ 1,288 (1,098) 6,551 $ 7,301
------ ------- ----- =======
Total liabilities and stockholders' equity (net
capital deficiency)................................ $4,340 $ 4,002 $11,770
====== ======= =======
</TABLE>
See accompanying notes.
F-3
<PAGE> 58
CARDIOVASCULAR DYNAMICS, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PREDECESSOR ENTITY
------------------
JANUARY 1,
1993 JUNE 10, 1993 YEAR ENDED THREE-MONTH PERIOD
THROUGH THROUGH DECEMBER 31, ENDED MARCH 31,
JUNE 9, DECEMBER 31, ------------------ ------------------
1993 1993 1994 1995 1995 1996
------------------ ------------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Revenue:
Sales (including $43 from a related
party in 1994)................... $ -- $ 126 $ 1,169 $ 3,462 $ 199 $ 1,783
License fee and other from related
party............................ -- -- 1,220 641 210 100
Contract........................... -- -- -- -- -- 150
------ ------------- ------- ------- ------- -------
Total revenue........................ -- 126 2,389 4,103 409 2,033
Operating costs and expenses:
Cost of sales...................... -- 79 848 2,051 118 942
Charge for acquired in-process
research and development......... -- 2,001 -- 488 -- --
Research and development (including
$99 for the period from June 10,
1993 through December 31, 1993
and $73 in 1994 paid to
Parent).......................... 245 489 1,228 1,683 432 627
Marketing and sales -- 94 748 1,526 255 577
General and administrative
(including $62 for the period
from June 10, 1993 through
December 31, 1993, and $227,
$340, $54 and $48 for the years
ended December 31, 1994 and 1995
and the three-month periods ended
March 31, 1995 and 1996,
respectively, paid to Parent).... 34 62 587 1,331 268 291
------ ------------- ------- ------- ------- -------
Total operating costs and expenses... 279 2,725 3,411 7,079 1,073 2,437
------ ------------- ------- ------- ------- -------
Loss from operations (279) (2,599) (1,022) (2,976) (664) (404)
Other income:
Interest income.................... 6 6 -- 42 22 11
Distributorship fees and other
income........................... 4 13 51 60 17 16
------ ------------- ------- ------- ------- -------
Total other income................... 10 19 51 102 39 27
------ ------------- ------- ------- ------- -------
Net loss............................. $ (269) $(2,580) $ (971) $(2,874) $ (625) $ (377)
============== =========== ======== ======== ======== ========
Pro forma net loss per share......... $ (.25) $ (.65) $ (.14) $ (.08)
======== ======== ======== ========
Shares used in computing pro forma
net loss per share................. 3,876 4,441 4,405 4,485
======== ======== ======== ========
</TABLE>
See accompanying notes.
F-4
<PAGE> 59
CARDIOVASCULAR DYNAMICS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
TOTAL
STOCKHOLDERS'
PREFERRED STOCK COMMON STOCK ADDITIONAL EQUITY
------------------- ------------------- PAID-IN DEFERRED ACCUMULATED (NET CAPITAL
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION DEFICIT DEFICIENCY)
---------- ------ ---------- ------ ---------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1992
(Predecessor Entity)....... 902,500 $ 893 1,000,000 $ 1 $ 26 $ -- $ (313) $ 607
Net loss through June 9,
1993 (Predecessor
Entity).................. -- -- -- -- -- -- (269) (269)
---------- ----- ---------- --- ------- ----- ------- -------
Balance at June 9, 1993
(Predecessor Entity)....... 902,500 893 1,000,000 1 26 -- (582) 338
Effects of merger with
EndoSonics Acquisition
Corp. ................... (902,500) (893 ) 2,240,000 2 2,310 -- 582 2,001
Net loss from June 10, 1993
to December 31, 1993..... -- -- -- -- -- -- (2,580) (2,580)
---------- ----- ---------- --- ------- ----- ------- -------
Balance at December 31,
1993....................... -- -- 3,240,000 3 2,336 -- (2,580) (241)
Sale of Common Stock to
corporate investor....... -- -- 760,000 1 2,499 -- -- 2,500
Net loss................... -- -- -- -- -- -- (971) (971)
---------- ----- ---------- --- ------- ----- ------- -------
Balance at December 31,
1994....................... -- -- 4,000,000 4 4,835 -- (3,551) 1,288
Additional effects of
merger with EndoSonics
Acquisition Corp......... -- -- -- -- 488 -- -- 488
Issuance of Preferred Stock
in exchange for Common
Stock.................... 2,000,000 2 (4,000,000) (4) 2 -- -- --
Deferred compensation
resulting from grant of
options.................. -- -- -- -- 345 (345) -- --
Net loss................... -- -- -- -- -- -- (2,874) (2,874)
---------- ----- ---------- --- ------- ----- ------- -------
Balance at December 31,
1995....................... 2,000,000 2 -- -- 5,670 (345) (6,425) (1,098)
Sale of Preferred Stock to
Parent (unaudited)....... 400,000 -- -- -- 8,000 -- -- 8,000
Deferred compensation
resulting from grant of
options (unaudited)...... -- -- -- -- 50 (50) -- --
Amortization of deferred
compensation
(unaudited).............. -- -- -- -- -- 26 -- 26
Net loss (unaudited)....... -- -- -- -- -- -- (377) (377)
---------- ----- ---------- --- ------- ----- ------- -------
Balance at March 31, 1996
(unaudited)................ 2,400,000 $ 2 -- $ -- $ 13,720 $ (369) $(6,802) $ 6,551
========== ===== ========== === ======= ===== ======= =======
</TABLE>
See accompanying notes.
F-5
<PAGE> 60
CARDIOVASCULAR DYNAMICS, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PREDECESSOR ENTITY
------------------ THREE-MONTH
JANUARY 1, JUNE 10, 1993 YEAR ENDED PERIOD
1993 THROUGH DECEMBER 31, ENDED MARCH 31,
THROUGH DECEMBER 31, ------------------ -----------------
JUNE 9, 1993 1993 1994 1995 1995 1996
------------------ ------------- ------- ------- ------- ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss.......................... $ (269) $(2,580) $ (971) $(2,874) $ (625) $ (377)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation and amortization... 7 6 18 74 18 45
Amortization of deferred
compensation................. -- -- -- -- -- 26
Charge for acquired in-process
research and development..... -- 2,001 -- 488 -- --
Net changes in:
Trade accounts receivable,
net........................ -- (65) (662) (390) 329 (467)
Receivable from related
parties.................... -- -- (125) 125 99 (100)
Inventories.................. -- (36) (14) (704) (96) 2
Other assets................. -- -- -- (135) (68) (15)
Accounts payable and accrued
expenses................... 12 (41) 273 1,369 81 85
Deferred distributor fee
revenue.................... 246 (13) (50) (54) (16) (12)
----- ------- ------- ------- ------- -------
Net cash used in operating
activities...................... (4) (728) (1,531) (2,101) (278) (813)
INVESTING ACTIVITIES
Capital expenditures for
furniture, fixtures and
equipment....................... (17) (10) (35) (443) (122) (146)
----- ------- ------- ------- ------- -------
Net cash used in investing
activities...................... (17) (10) (35) (443) (122) (146)
FINANCING ACTIVITIES
Proceeds from issuance of
convertible obligation.......... -- -- -- 750 -- --
Proceeds from sale of Common
Stock........................... -- -- 2,500 -- -- --
Proceeds from sale of Preferred
Stock to Parent................. -- -- -- -- -- 8,000
Payable to Parent, net............ -- 656 1,898 (17) (212) 46
----- ------- ------- ------- ------- -------
Net cash provided by (used in)
financing activities............ -- 656 4,398 733 (212) 8,046
----- ------- ------- ------- ------- -------
Net increase (decrease) in cash... (21) (82) 2,832 (1,811) (612) 7,087
Cash, beginning of period......... 650 629 547 3,379 3,379 1,568
----- ------- ------- ------- ------- -------
Cash, end of period............... $ 629 $ 547 $ 3,379 $ 1,568 $ 2,767 $8,655
===== ======= ======= ======= ======= =======
</TABLE>
See accompanying notes.
F-6
<PAGE> 61
CARDIOVASCULAR DYNAMICS, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AT MARCH 31, 1996 AND FOR THE THREE-MONTH PERIODS
ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
1. BUSINESS, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Business and Basis of Presentation
CardioVascular Dynamics, Inc. (the "Predecessor") was incorporated on March
16, 1992 in the State of California. The Predecessor, and its successor
corporation discussed below, develops, manufactures and markets proprietary
therapeutic catheters used to treat certain vascular diseases.
In June 1992, EndoSonics Corporation ("EndoSonics" or "Parent") acquired a
40% preferred interest in the Predecessor. EndoSonics, a Delaware corporation,
develops, manufactures, and markets intravascular ultrasound imaging systems and
diagnostic, therapeutic and imaging catheters for the treatment of coronary and
peripheral vascular disease.
In June 1993, EndoSonics acquired all of the remaining Preferred and Common
Stock of the Predecessor. The acquisition was accomplished through a merger
between the Predecessor and EndoSonics Acquisition Corp., a wholly owned
subsidiary of EndoSonics (which then changed its name to CardioVascular
Dynamics, Inc.). The merger was treated as a tax-free reorganization for income
tax purposes. The accompanying financial statements present the results of
operations, cash flows and changes in stockholders' equity for the Predecessor
through June 9, 1993, and of CardioVascular Dynamics, Inc. (hereinafter referred
to as "CVD" or the "Company") thereafter. For practical purposes the actual
cut-off date was June 30, 1993; however, the activity between June 10, 1993 and
June 30, 1993 was not material.
The acquisition by EndoSonics resulted in a new basis for the CVD assets
and liabilities. Accordingly, the purchase price paid by EndoSonics has been
allocated to the identifiable assets and liabilities, including in-process
research and development, which was immediately expensed as no CVD products had
received regulatory approval and the technology did not have identifiable
alternative uses. The amount by which the purchase price exceeded the
Predecessor's net book value has been reflected as paid-in capital in the
accompanying financial statements. Pursuant to the terms of the original merger
agreement, in June 1995 EndoSonics issued an additional 50,000 shares of its
Common Stock to the former shareholders of the Predecessor. The fair market
value of such shares of $488 has been reflected in the accompanying financial
statements as an additional charge for acquired in-process technology.
Subsequent to the acquisition, EndoSonics began performing certain services
for CVD (see Note 3), including general management, accounting, cash management,
and other administrative and engineering services. The amounts charged to CVD
for such services have been determined based on proportional cost allocations
and have been agreed to by the management of CVD and EndoSonics. In the opinion
of CVD's management, the allocation methods used are reasonable. Such
allocations, however, are not necessarily indicative of costs that would have
been incurred had CVD continued to operate independent of EndoSonics. No formal
agreement currently exists which specifies the nature of services to be provided
by EndoSonics to CVD, or the charges for such services. Therefore, the 1995
amounts are not necessarily indicative of the future charges to be incurred by
CVD.
In 1994, the Board of Directors of CVD approved a 16,200-for-1 Common Stock
split which has been reflected retroactively for all periods subsequent to the
merger in the accompanying financial statements (See Note 11).
Interim Results
The accompanying balance sheet as of March 31, 1996 and the statements of
operations, stockholders' equity and cash flows for the three months ended March
31, 1995 and 1996 are unaudited. In the opinion of
F-7
<PAGE> 62
CARDIOVASCULAR DYNAMICS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT MARCH 31, 1996 AND FOR THE THREE-MONTH PERIODS
ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
management, the statements have been prepared on the same basis as the audited
financial statements and include all adjustments, consisting only of normal
recurring adjustments, necessary for the fair statement of the results of
interim periods. The data disclosed in these notes to the financial statements
for these periods are unaudited.
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 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.
Inventories
Inventories are comprised of raw materials, work-in-process and finished
goods and are stated at the lower of cost, determined on an average cost basis,
or market value.
Property and Equipment
Property and equipment are stated at cost and depreciated or amortized on a
straight-line basis over the lesser of the estimated useful lives of the assets
or the lease term. The estimated useful lives range from three to five years.
Concentrations of Credit Risk and Significant Customers
The Company maintains its cash in deposit accounts at a major financial
institution.
The Company sells its products primarily to medical institutions and
distributors worldwide. The Company performs ongoing credit evaluations of its
customers' financial condition and generally does not require collateral from
customers. Management believes that an adequate allowance for doubtful accounts
has been provided.
During 1994 and 1995, product sales to Fukuda Denshi Co., Ltd., ("Fukuda"),
the Company's Japanese distributor (see Note 4), comprised 61% and 18% of total
revenue. Accounts receivable from Fukuda represented 78% and 15% of net accounts
receivable at December 31, 1994 and 1995, respectively.
During the period from June 10, 1993 to December 31, 1993, product sales to
another of the Company's international distributors comprised 57% of total
revenue. One customer comprised 12% of revenues for the year ended December 31,
1995 and 14% of accounts receivable at December 31, 1995.
Export Sales
The Company had export sales by region as follows:
<TABLE>
<CAPTION>
PERIOD FROM
JUNE 10,
1993 YEAR ENDED THREE-MONTH
TO DECEMBER 31, PERIOD ENDED
DECEMBER 31, --------------- MARCH 31,
1993 1994 1995 1996
------------ ---- ------ -------------
<S> <C> <C> <C> <C>
Europe.................................. $101 $255 $1,179 $ 411
Japan................................... -- 715 744 455
Latin America........................... -- -- 131 272
---- ---- ------ -------
$101 $970 $2,054 $ 1,138
==== ==== ====== =======
</TABLE>
F-8
<PAGE> 63
CARDIOVASCULAR DYNAMICS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT MARCH 31, 1996 AND FOR THE THREE-MONTH PERIODS
ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Revenue Recognition and Warranty
The Company recognizes revenue from the sale of its products when the goods
are shipped to its customers. Reserves are provided for anticipated product
returns and warranty expenses at the time of shipment.
Accounting for Stock-Based Compensation
In October 1995, the Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation," ("SFAS 123") was issued and is
effective for the Company's 1996 year end. The Company intends to continue to
account for employee stock options in accordance with APB Opinion No. 25 and
will make the pro forma disclosures required by SFAS 123 beginning in 1996.
Income Taxes
Since June 1993, the Company's results of operations have been included in
consolidated tax returns filed by EndoSonics. There was no income tax provision
for the consolidated tax group during the periods covered by these financial
statements. All net operating loss and credit carryforwards and deferred tax
assets and liabilities have been disclosed herein on a separate company basis
for CVD.
Pro Forma Net Loss Per Share
Pro forma net loss per share is computed using the weighted average number
of shares of Common Stock, convertible Preferred Stock (using the
as-if-converted method) and Common Stock issuable upon conversion of the
Convertible Obligation, outstanding. Common equivalent shares from stock options
and warrants are not included as the effect is anti-dilutive, except that in
accordance with Securities and Exchange Commission Staff Accounting Bulletins,
common equivalents shares issued by the Company at prices substantially below
the anticipated initial public offering price during the period beginning one
year prior to the proposed public offering have been included in the calculation
as if they were outstanding for all periods presented (using the treasury stock
method and the estimated initial public offering price).
Net loss per share information calculated in accordance with APB Opinion
No. 15 for the periods from January 1, 1993 to June 9, 1993 (predecessor entity)
and from June 10, 1993 to December 31, 1993 has not been presented as such
information is not meaningful as a result of the changes in the Company's
capital structure during those periods.
2. SCIMED LIFE SYSTEMS, INC.
In September 1994, CVD and EndoSonics entered into a Stock Purchase and
Technology License Agreement with SCIMED Life Systems, Inc. ("SCIMED"). SCIMED
acquired a 19% interest in CVD in exchange for $2,500 in cash. If the Company
has not completed an initial public offering, or in certain other circumstances,
at the three year anniversary of the agreement, SCIMED may exchange its shares
of CVD Series A Preferred Stock for shares of EndoSonics Common Stock at a
guaranteed conversion rate such that the value of the EndoSonics shares issued
will not be less than $2,500. The Company also granted SCIMED the right, through
the earlier of December 31, 1997 or the effective date of an initial
registration, and offering of CVD shares to the public, to maintain its 19%
ownership interest ("anti-dilution right").
CVD also granted SCIMED an exclusive license to certain patents in the
cardiovascular field of use, which allows SCIMED to manufacture the Transport
PTCA infusion catheter (the "Transport") developed by CVD in exchange for a
$1,000 license fee that was paid in 1994. SCIMED will pay royalties to CVD on
F-9
<PAGE> 64
CARDIOVASCULAR DYNAMICS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT MARCH 31, 1996 AND FOR THE THREE-MONTH PERIODS
ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
sales of the Transport and other products which use this patented technology.
CVD retains rights to this technology and the associated patents for use outside
of the cardiovascular field.
During June 1995, the Company issued a warrant to SCIMED to purchase up to
40,000 shares of Series A Preferred Stock at an exercise price of $6.58 per
share in exchange for a waiver of SCIMED's anti-dilution right. The warrant
expires in September 1997.
SCIMED also paid CVD $220 and $641 in 1994 and 1995, respectively, on a
cost reimbursement basis to fund continuing development of the technology and
for other support. Additionally, the Company recorded $43 in product sales to
SCIMED during 1994 (none in 1995) and had accounts receivable from SCIMED
totaling $125 as of December 31, 1994, none at December 31, 1995 and $100 at
March 31, 1996.
3. RELATED PARTY TRANSACTIONS
The following is a summary of significant transactions between CVD and
EndoSonics:
- During 1994 and a portion of 1995, EndoSonics manufactured certain of the
Company's catheter products at cost plus a mark-up of 30%. Total
purchases from EndoSonics during 1994 and 1995 amounted to $843 and $172,
respectively. In addition, during 1994 EndoSonics performed certain
billing and collection services for CVD in return for a fee per invoice
which aggregated to $10.
- Beginning in August 1993, certain EndoSonics corporate expenses,
primarily related to executive management time, accounting, cash
management, and other administrative and engineering services, have been
allocated to the Company. Total expenses allocated were $161 for the
period from June 10, 1993 to December 31, 1993, and $290, $340, $54 and
$48 for the years ended December 31, 1994 and 1995 and for the
three-month periods ended March 31, 1995 and 1996, respectively.
No interest expense has been charged on the net payable due to EndoSonics.
The following is an analysis of the payable to EndoSonics:
<TABLE>
<CAPTION>
PERIOD FROM
JUNE 10, THREE-MONTH
1993 YEAR ENDED PERIOD ENDED
TO DECEMBER 31, MARCH 31,
DECEMBER 31, ----------------- -----------------
1993 1994 1995 1995 1996
------------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Beginning balance................. $ -- $ 656 $2,554 $2,554 $2,537
Inventory purchases............... 105 843 172 166 --
Corporate cost allocations........ 161 300 340 54 48
Cash disbursements made by
EndoSonics on behalf of CVD..... 430 1,730 312 82 --
Cash collections made by
EndoSonics on behalf of CVD..... (39) (318) (700) (524) --
Cash payments to EndoSonics....... -- (549) -- -- --
Cash disbursements made by CVD on
behalf of EndoSonics and
other........................... (1) (108) (141) 10 (2)
---- ------ ------ ------ ------
Ending balance.................... $656 $2,554 $2,537 $2,342 $2,583
==== ====== ====== ====== ======
Average balance during period..... $280 $1,750 $2,551 $2,448 $2,566
==== ====== ====== ====== ======
</TABLE>
(See Notes 5 and 11)
F-10
<PAGE> 65
CARDIOVASCULAR DYNAMICS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT MARCH 31, 1996 AND FOR THE THREE-MONTH PERIODS
ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
4. AGREEMENTS WITH FUKUDA
The Company has executed a distribution agreement with Fukuda. The
agreement provides Fukuda with exclusive distribution rights relative to certain
of the Company's products in Japan for periods extending through May 1999, which
may be extended at the option of the parties. Distribution fee revenue received
from Fukuda are deferred and are being recognized as revenue over the initial
periods covered by the respective agreements.
In July 1995 and May 1996, the distribution agreement with Fukuda was
amended. In exchange for the exclusive distribution rights to additional CVD
products, the Company received $750 which is convertible into Common Stock upon
the consummation of this offering. The Company has accounted for this as a
convertible obligation payable as of December 31, 1995.
5. LICENSE AGREEMENTS
In January 1995 the Company entered into a license agreement with Advanced
Cardiovascular Systems, Inc. ("ACS") under which the Company acquired the
exclusive worldwide rights to ACS' SmartNeedle technology. ACS currently
manufactures the product for the Company. The Company is obligated to assume
responsibility for manufacturing the product in 1996, subject to the payment of
royalties. ACS was granted an option, which was exercised in February 1996, to
obtain exclusive worldwide rights to certain CVD perfusion technology. In
exchange for the perfusion technology, ACS is obligated to make milestone and
minimum royalty payments to CVD, and also has certain obligations to develop and
market the perfusion technology. An initial milestone of $150 was earned in the
three-months ended March 31, 1996.
The Company has entered into a license agreement with EndoSonics pursuant
to which CVD granted EndoSonics the non-exclusive, royalty-free right to certain
technology for use in the development and sale of certain products. In exchange,
CVD received the non-exclusive, royalty-free right to utilize certain of
EndoSonics' product regulatory filings to obtain regulatory approval of CVD
products.
6. INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------- MARCH 31,
1994 1995 1996
---- ---- -----------
<S> <C> <C> <C>
Raw materials.......................................... $ -- $162 $ 274
Work in process........................................ -- 330 223
Finished goods......................................... 50 262 255
---- ---- ----
$ 50 $754 $ 752
==== ==== ====
</TABLE>
F-11
<PAGE> 66
CARDIOVASCULAR DYNAMICS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT MARCH 31, 1996 AND FOR THE THREE-MONTH PERIODS
ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
7. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------- MARCH 31,
1994 1995 1996
---- ------ -----------
<S> <C> <C> <C>
Accounts payable..................................... $122 $ 962 $ 967
Accrued payroll and related expenses................. 86 352 344
Accrued warranty..................................... 20 113 113
Other accrued expenses............................... 87 257 345
---- ------ ------
$315 $1,684 $ 1,769
==== ====== ======
</TABLE>
8. COMMITMENTS
Operating Leases
The Company leases its administrative, research and manufacturing
facilities and certain equipment under long-term, noncancelable lease agreements
that have been accounted for as operating leases. Certain of these leases
include scheduled rent increases and renewal options as prescribed by the
agreements.
Future minimum payments by year under long-term, noncancellable operating
leases were as follows as of December 31:
<TABLE>
<S> <C>
1996.......................................................... $195
1997.......................................................... 175
1998.......................................................... 103
1999.......................................................... 9
----
$482
====
</TABLE>
Rental expense charged to operations for all operating leases during the
periods from January 1, 1993 to June 9, 1993, June 10, 1993 to December 31, 1993
and the years ended December 31, 1994 and 1995, was approximately $10, $10, $60,
and $171, respectively.
9. SHAREHOLDERS EQUITY
Preferred Stock
In February 1995, every two shares of the Company's outstanding Common
Stock was exchanged for one share of Series A Preferred Stock with a liquidation
preference of $6.58 per share. In March 1996, the Company issued 400,000 shares
of Series B Preferred Stock to EndoSonics at $20.00 per share for aggregate
proceeds of $8,000.
F-12
<PAGE> 67
CARDIOVASCULAR DYNAMICS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT MARCH 31, 1996 AND FOR THE THREE-MONTH PERIODS
ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Authorized and outstanding Preferred Stock and its principal terms are as
follows at March 31, 1996:
<TABLE>
<CAPTION>
PER SHARE
-----------------------
LIQUIDATION
SERIES AUTHORIZED OUTSTANDING DIVIDEND PREFERENCE
- ------------ ---------- ----------- -------- ----------
<S> <C> <C> <C> <C>
A 2,060,000 2,000,000 $ 0.50 $ 6.58
B 500,000 400,000 $ 1.50 $20.00
Undesignated 5,000,000 -- -- --
--------- ---------
7,560,000 2,400,000
========= =========
</TABLE>
The holders of Preferred Stock are entitled to receive dividends when and
if declared by the Board of Directors. These dividends are in preference to any
declaration or payment of any dividends or distributions with respect to the
Company's Common Stock. As of December 31, 1995, no dividends have been
declared.
Preferred stockholders have voting rights equivalent to the number of
shares of Common Stock into which their shares are convertible. Subject to
certain antidilution provisions and other adjustments, each share of Series A
and Series B Preferred Stock is convertible, at the holder's option, into two
shares of Common Stock. All shares of Preferred Stock convert automatically to
Common Stock upon the earlier of a public offering of the Company's Common Stock
with an aggregate offering price of $7,500 or upon the date which the Company
obtains the consent of the holders of a majority of the then-outstanding shares
of Preferred Stock.
Stock Option Plan
Under the terms of the Company's 1995 Stock Option Plan (the "1995 Plan")
eligible key employees, directors, and consultants can receive options to
purchase shares of the Company's Common Stock at a price not less than 100% for
incentive stock options and 85% for nonqualified stock options of the fair value
on the date of grant, as determined by the Board of Directors. The Company has
authorized 977,000 shares of Common Stock for issuance under the 1995 Plan. The
options granted under the 1995 Plan are exercisable over a maximum term of ten
years from the date of grant and generally vest over a four year period. Shares
underlying the exercise of unvested options are subject to various restrictions
as to resale and right of repurchase by the Company which lapses over the
vesting period.
Through December 31, 1995 the Company had granted options to purchase
957,000 shares of Common Stock with exercise prices ranging from $1.00 to $1.50.
An additional 20,000 options were granted during the three-month period ended
March 31, 1996 at an exercise price of $2.50 per share. No options have been
exercised and 125,000 options were exercisable at December 31, 1995 (184,458 at
March 31, 1996).
During 1995, the Company recorded deferred compensation of approximately
$345 for financial reporting purposes to reflect the difference between the
exercise price of certain options and the deemed fair value, for financial
statement presentation purposes, of the Company's shares of Common Stock. An
additional $50 of deferred compensation was recorded during the three-month
period ended March 31, 1996. Deferred compensation is being amortized over the
vesting period of the related options.
F-13
<PAGE> 68
CARDIOVASCULAR DYNAMICS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT MARCH 31, 1996 AND FOR THE THREE-MONTH PERIODS
ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
10. INCOME TAXES
Significant components of the Company's deferred tax assets and liabilities
are as follows at December 31:
<TABLE>
<CAPTION>
1994 1995
----------------- -----------------
FEDERAL STATE FEDERAL STATE
------- ----- ------- -----
<S> <C> <C> <C> <C>
Net operating loss carryforward.................. $ 641 $ 55 $ 1,322 $ 60
Research and development credits................. -- -- 97 25
Inventory write-downs............................ -- -- 73 13
Capitalized research and development............. -- -- -- 150
Deferred revenue................................. 64 11 45 8
Bad debt reserve................................. 30 5 63 11
Other............................................ 16 3 20 3
----- ---- ------- -----
Gross deferred tax assets........................ 751 74 1,620 270
Valuation allowance.............................. (745) (73) (1,620) (270)
----- ---- ------- -----
Total deferred tax assets........................ 6 1 -- --
Other............................................ (6) (1) -- --
----- ---- ------- -----
Gross deferred tax liabilities................... (6) (1) -- --
----- ---- ------- -----
Net deferred tax assets.......................... $ -- $ -- $ -- $ --
===== ==== ======= =====
</TABLE>
The Company believes that, based on a number of factors including the lack
of an earnings history, there is uncertainty regarding the realizability of the
deferred tax assets such that a full valuation allowance has been recorded. The
valuation allowance increased by $317, $391 and $1,072 in 1993, 1994 and 1995,
respectively.
At December 31, 1995, the Company has net operating loss carryforwards for
federal income tax purposes of approximately $3,800, which expire in the years
2006 through 2010 and net operating loss carryforwards for state tax purposes of
approximately $1,000 which expire in the years 1997 through 2000.
Because of the "change of ownership" provision of the Tax Reform Act of
1986, utilization of the Company's net operating loss carryforwards may be
subject to an annual limitation against taxable income in future periods. As a
result of the annual limitation, a portion of these carryforwards may expire
before ultimately becoming available to reduce future income tax liabilities.
11. SUBSEQUENT EVENTS
In May 1996, the Board of Directors authorized management of the Company to
file a registration statement with the Securities and Exchange Commission
authorizing the issuance of 3,400,000 shares of Common Stock to the public (the
"offering"). If the offering is consummated under the terms presently
anticipated, each share of convertible Preferred Stock outstanding will convert
into two shares of Common Stock and the Convertible Obligation will convert into
62,500 shares of Common Stock (assuming an initial public offering price of
$12.00 per share). Unaudited pro forma stockholders' equity, as adjusted for the
assumed conversion of the convertible Preferred Stock and Convertible Obligation
described above, is set forth on the accompanying balance sheet.
In anticipation of the offering, the Company effected a 2-for-1 stock split
of all outstanding shares of Common Stock and options and changed the conversion
ratio of Preferred Stock to two shares of Common Stock for each Preferred share.
All Common share and per share amounts included in the accompanying
F-14
<PAGE> 69
CARDIOVASCULAR DYNAMICS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT MARCH 31, 1996 AND FOR THE THREE-MONTH PERIODS
ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
financial statements have been retroactively adjusted to reflect the stock split
as well as the change in the Preferred Stock conversion ratio.
In May 1996 the Company adopted the 1996 Stock Option/Stock Issuance Plan
(the "1996 Plan") which is the successor to the Company's existing 1995 Plan
(see Note 9). A total of 1,200,000 shares of Common Stock have been reserved for
future issuance under the 1996 Plan including those shares previously reserved
under the 1995 Plan. The 1996 Plan provides for the grant of stock options or
issuances of stock to employees, consultants and directors of the Company.
In May 1996, the Company also adopted the 1996 Employee Stock Purchase Plan
(the "Purchase Plan"). A total of 200,000 shares of Common Stock are reserved
for issuance under the Purchase Plan. The Purchase Plan permits eligible
employees to purchase Common Stock through payroll deductions at a price equal
to the lower of 85% of the fair market value of the Company's Common Stock at
the beginning or end of the applicable offering period.
During May 1996, the Company agreed to issue an additional warrant to
SCIMED to purchase up to 20,000 shares of Series A Preferred Stock at an
exercise price of $6.58 per share in exchange for a waiver of SCIMED's
anti-dilution right related to the shares to be issued under the 1996 Plan. (See
Note 2).
In connection with the offering, CVD and EndoSonics will enter into a Tax
Allocation Agreement that will provide, among other things, for (i) the
allocation of tax liabilities and adjustments thereto as between the business of
the Company and other businesses conducted by EndoSonics and its affiliates
related to periods in which the Company is includable in consolidated federal
income tax returns filed by EndoSonics, (ii) the allocation of responsibility
for filing tax returns and (iii) the conduct of and responsibility for taxes
owed in connection with tax audits and various related matters.
EndoSonics and CVD will also enter into a Stockholder Agreement providing
that all transactions between the Company and EndoSonics or any affiliate of
EndoSonics must be approved by a special committee of CVD's Board of Directors
comprised of two directors who are not officers, directors, employees or
affiliates of EndoSonics. The provisions of this agreement will become effective
upon the consummation of the offering and will terminate on the earlier of seven
years from the date of the agreement or on the date EndoSonics beneficially owns
less than 25% of CVD's Common Stock.
F-15
<PAGE> 70
[ART WORK]
<PAGE> 71
- ------------------------------------------------------
- ------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER
TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON OR BY ANY ONE IN ANY
JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 6
The Company........................... 14
Use of Proceeds....................... 14
Dividend Policy....................... 14
Capitalization........................ 15
Dilution.............................. 16
Selected Financial Data............... 17
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.......................... 18
Business.............................. 22
Management............................ 36
Certain Transactions.................. 43
Principal Stockholders................ 46
Description of Capital Stock.......... 47
Shares Eligible for Future Sale....... 49
Underwriting.......................... 51
Legal Matters......................... 52
Experts............................... 52
Additional Information................ 52
Index to Financial Statements......... F-1
------------------------
UNTIL , 1996 (25 DAYS AFTER
THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK
OFFERED HEREBY, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO
DELIVER A PROSPECTUS. THIS IS IN ADDITION TO
THE OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND
WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
- ---------------------------------------------
- ---------------------------------------------
</TABLE>
- ------------------------------------------------------
- ------------------------------------------------------
3,400,000 SHARES
LOGO
COMMON STOCK
------------------------
PROSPECTUS
------------------------
VOLPE, WELTY & COMPANY
WESSELS, ARNOLD & HENDERSON
VECTOR SECURITIES INTERNATIONAL, INC.
, 1996
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 72
APPENDIX
INSIDE FRONT COVER
Caption: The Next Generation...The Company's FOCAL and M(3) Catheters have been
approved by the FDA only for certain applications. See "Business -- Products."
[Graphic: FOCAL Technology catheter. This graphic was previously filed with the
Company's Registration Statement on Form S-1.]
Graphic Caption: CVD's patented FOCAL Technology catheter balloons have smaller
end diameters and larger center diameters which target therapy directly to the
site of the coronary disease.
[Graphic: M(3) Technology catheter. This graphic was previously filed with the
Company's Registration Statement on Form S-1.]
Graphic Caption: CVD's patented M(3) Technology combines multiple membranes of
polymeric balloon material to form a single balloon that enables balloon
angioplasty with local drug delivery and perfusion of blood on a single device.
GATEFOLD FOLLOWING INSIDE FRONT COVER
Caption: The Next Generation...
Caption: FOCAL Force Delivery
[Graphic: Atherosclerotic blockage in a coronary artery. This graphic was
previously filed with the Company's Registration Statement on Form S-1.]
Graphic Caption: This drawing depicts a typical atherosclerotic blockage in a
coronary artery (8-12mm length).
[Graphic: Inflated conventional angioplasty balloon. This graphic was previously
filed with the Company's Registration Statement on Form S-1.]
Graphic Caption: Conventional balloon angioplasty may cause significant damage
to the arterial wall surrounding the blockage.
[Graphic: Inflated FOCAL Technology balloon. This graphic was previously filed
with the Company's Registration Statement on Form S-1.]
Graphic Caption: FOCAL angioplasty directs therapeutic radial force at the
blockage with minimal damage to the adjacent arterial wall.
[Graphic: Stent positioned on FOCAL Technology balloon. This graphic was
previously filed with the Company's Registration Statement on Form S-1.]
<PAGE> 73
Graphic Caption: The Company's FOCAL and M(3) Catheters have not been approved
for stent delivery by the FDA for commercial sale in the United States. The
Company markets these catheters for stent delivery in international markets
only. There can be no assurance that these products will receive FDA approval
for stent delivery.
Caption: Vascular Stent Delivery
[Graphic: Angiogram. This graphic was previously filed with the Company's
Registration Statement on Form S-1.]
Graphic Caption: Pre-procedure angiogram showing blockage of an artery.
[Graphic: Angiogram. This graphic was previously filed with the Company's
Registration Statement on Form S-1.]
Graphic Caption: CVD FOCAL catheter delivering standard coronary stent to
disease site.
[Graphic: Angiogram. This graphic was previously filed with the Company's
Registration Statement on Form S-1.]
Graphic Caption: Post-procedure angiogram showing successful result.
Caption: Local Drug Delivery
[Graphic: Drug delivery catheter. This graphic was previously filed with the
Company's Registration Statement on Form S-1.]
Graphic Caption: The crossing profile of the deflated drug delivery-PTCA
catheter is equal to or smaller than most conventional angioplasty catheters.
[Graphic: Drug delivery catheter. This graphic was previously filed with the
Company's Registration Statement on Form S-1.]
Graphic Caption: The catheter can be inflated with contrast media in the same
manner as conventional angioplasty catheters to perform balloon angioplasty.
[Graphic: Drug delivery catheter. This graphic was previously filed with the
Company's Registration Statement on Form S-1.]
Graphic Caption: The M(3) membrane surrounds the angioplasty balloon and allows
controlled, uniform, site-specific delivery of drugs.
[Graphic: Drug delivery catheter. This graphic was previously filed with the
Company's Registration Statement on Form S-1.]
Graphic Caption: The Company's M(3) site-specific drug delivery technology can
be combined with stent delivery on a single catheter.
<PAGE> 74
INSIDE BACK COVER
Caption: Vascular Access Delivery
[Graphic: SmartNeedle Vascular Access Product. This graphic was previously filed
with the Company's Registration Statement on Form S-1.]
Graphic Caption: The Company's patented SmartNeedle vascular access technology
provides rapid, vascular access to the vasculature to facilitate interventional
procedures.
Caption: FOCAL Technology Products -- FOCUS, CAT, FACT ARC, LYNX
M(3) Technology Products -- Periflow, Bullett, Transport
Vascular Access Products -- SmartNeedle
Caption: The CAT is not available in the United States due to patent
restrictions. The LYNX and Transport are in development and have not been
approved by the FDA for sale in the United States. There can be no assurance
that FDA approval will be obtained for such products. See "Business --
Products" and "-- New Product Development."
<PAGE> 75
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Company in connection
with the sale of Common Stock being registered. All amounts are estimates except
the SEC registration fee and the NASD filing fees.
<TABLE>
<S> <C>
SEC Registration fee.................................................... $ 17,778
NASD fee................................................................ 5,583
Nasdaq National Market listing fee...................................... 43,075
Printing and engraving.................................................. 120,000
Legal fees and expenses................................................. 225,000
Accounting fees and expenses............................................ 150,000
Blue sky fees and expenses.............................................. 15,000
Transfer agent fees..................................................... 10,000
Directors' and Officers' Liability Insurance............................ 150,000
Miscellaneous........................................................... 33,564
---------
Total.............................................................. $ 770,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law authorizes a court to
award or a corporation's Board of Directors to grant indemnification to
directors and officers in terms sufficiently broad to permit such
indemnification under certain circumstances for liabilities (including
reimbursement for expenses incurred) arising under the Securities Act of 1933,
as amended (the "Securities Act"). Article VIII of the Registrant's Bylaws
provides for mandatory indemnification of its directors and officers and
permissible indemnification of employees and other agents to the maximum extent
permitted by the Delaware General Corporation Law. The Registrant's Certificate
of Incorporation provides that, pursuant to Delaware law, its directors shall
not be liable for monetary damages for breach of the directors' fiduciary duty
as directors to the Company and its stockholders. This provision in the
Certificate of Incorporation does not eliminate the directors' fiduciary duty,
and in appropriate circumstances equitable remedies such as injunctive or other
forms of non-monetary relief will remain available under Delaware law. In
addition, each director will continue to be subject to liability for breach of
the director's duty of loyalty to the Company for acts or omissions not in good
faith or involving intentional misconduct, for knowing violations of law, for
actions leading to improper personal benefit to the director, and for payment of
dividends or approval of stock repurchases or redemptions that are unlawful
under Delaware law. The provision also does not affect a director's
responsibilities under any other law, such as the federal securities laws or
state or federal environmental laws. The Registrant has entered into
Indemnification Agreements with its directors, a form of which is attached as
Exhibit 10.1 hereto and incorporated herein by reference. The Indemnification
Agreements provide the Registrant's directors with further indemnification to
the maximum extent permitted by the Delaware General Corporation Law. Reference
is also made to the Underwriting Agreement contained in Exhibit 1.1 hereto,
indemnifying officers and directors of the Registrant against certain
liabilities.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since June 1993, the Registrant has issued and sold the following
securities:
1. On September 10, 1994, the Company issued and sold an aggregate of
380,000 shares of Common Stock (subsequently recapitalized into Series A
Preferred Stock) to SCIMED for an aggregate purchase price of $2,500,000.
II-1
<PAGE> 76
2. On July 17, 1995, the Company issued a $750,000 convertible
obligation to Fukuda. The convertible obligation will convert into Common
Stock at the public offering price upon the consummation of this offering.
3. On June 30, 1995 and May 2, 1996, the Company issued warrants to
SCIMED to purchase 40,000 shares of Series A Preferred Stock and 20,000
shares of Series A Preferred Stock, respectively, each at an exercise price
of $6.58 per share. The warrants were issued in connection with the waiver
of certain rights by SCIMED under the Stock Purchase and Technology License
Agreement dated September 10, 1994, as amended on September 29, 1995.
4. On March 29, 1996, the Company issued and sold an aggregate of
400,000 shares of Series B Preferred Stock to EndoSonics Corporation for an
aggregate purchase price of $8,000,000.
The issuances of the securities described above were deemed to be exempt
from registration under the Securities Act in reliance on Section 4(2) of such
Act as transactions by an issuer not involving any public offering. In addition,
the recipients of securities in each such transaction represented their
intentions to acquire the securities for investment only and not with a view to
or for sale in connection with any distribution thereof and appropriate legends
were affixed to the share certificates issued in such transactions. All
recipients had adequate access, through their relationships with the Registrant,
to information about the Registrant.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
--------- ------------------------------------------------------------------------------
<S> <C>
1.1 Form of Underwriting Agreement.
2.1(2) Agreement and Plan of Reorganization dated as of June 9, 1993 among EndoSonics
Corporation ("EndoSonics"), EndoSonics Acquisition Corporation and
CardioVascular Dynamics, Inc. ("CVD").
2.2(2) First Amendment dated as of June 30, 1993 to the Agreement and Plan of
Reorganization among EndoSonics, EndoSonics Acquisition Corporation and CVD.
3.1(2) Certificate of Incorporation.
3.2(2) Amended Bylaws.
4.1 Specimen Certificate of Common Stock.
5.1 Opinion of Brobeck, Phleger & Harrison LLP.
10.1(2) Form of Indemnification Agreement to be entered into between the Registrant
and its directors and officers.
10.2(2) The Registrant's 1996 Stock Option Plan and forms of agreements thereunder.
10.3(2) The Registrant's Employee Stock Purchase Plan and forms of agreement
thereunder.
10.4(2) Series A Supplemental Stock Purchase Agreement dated June 5, 1992, by and
between the Company and CVD.
10.5(2) Stock Purchase Option Agreement dated June 5, 1992, by and between EndoSonics
and CVD.
10.6*(2) Japanese Distribution Agreement dated May 28, 1993, as amended on October 27,
1994 and July 17, 1995, (the "Japanese Distribution Agreements") by and
between CVD and Fukuda Denshi Co., Ltd. ("Fukuda")
10.7*(2) Stock Purchase and Technology License Agreement dated September 10, 1994, as
amended on September 29, 1995, by and among EndoSonics, CVD and SCIMED Life
Systems, Inc. ("SCIMED").
10.8(2) Waiver and Grant of Warrant dated June 30, 1995 by and between SCIMED, CVD and
EndoSonics.
10.9*(2) License Agreement dated January 15, 1995 by and between CVD and Advanced
Cardiovascular Systems, Inc. ("ACS").
10.10*(2) License Agreement dated March 4, 1996 by and between CVD and ACS.
10.11(2) Series B Stock Purchase Agreement dated March 29, 1996 by and between CVD and
EndoSonics.
10.12(2) License Agreement dated December 22, 1995 by and between CVD and EndoSonics.
10.13 Form of Stockholder Agreement with EndoSonics.
</TABLE>
II-2
<PAGE> 77
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
--------- ------------------------------------------------------------------------------
<S> <C>
10.14 Form of Tax Allocation Agreement with EndoSonics.
10.15(2) Industrial Lease dated February 23, 1995 by and between the Irvine Company and
CVD.
10.16 Waiver and Grant of Warrant dated May 2, 1996 by and between SCIMED, CVD and
EndoSonics.
10.17(1) Amendment to Japanese Distribution Agreements dated May 13, 1996 by and
between CVD and Fukuda.
11.1 Computation of Earnings Per Share.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2 Consent of Brobeck, Phleger & Harrison LLP (Reference is made to Exhibit 5.1).
24.1(2) Power of Attorney.
27.1(1) Financial Data Schedule.
</TABLE>
- ---------------
* Confidential treatment requested.
(1) Previously filed as an exhibit to Amendment No. 1 to the Company's
Registration Statement on Form S-1 filed with the Securities and Exchange
Commission on May 17, 1996.
(2) Previously filed as an exhibit to the Company's Registration Statement on
Form S-1 filed with the Securities and Exchange Commission on May 3, 1996.
(B) FINANCIAL STATEMENT SCHEDULES
Schedule II -- Valuation and Qualifying Accounts
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
ITEM 17. UNDERTAKINGS
The Registrant hereby undertakes to provide to the Underwriters at the
closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the Delaware General Corporation Law, the Certificate of
Incorporation or the Bylaws of the Registrant, Indemnification Agreements
entered into between the Registrant and its directors, the Underwriting
Agreement, or otherwise, the Registrant has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act, and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a director,
officer, or controlling person of the Registrant in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered hereunder,
the Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question of whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
The Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of Prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of Prospectus shall
be deemed to be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-3
<PAGE> 78
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 2 to the Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Irvine, State of California, on this 6th day of June, 1996.
CARDIOVASCULAR DYNAMICS, INC.
By: /s/ DANA P. NICKELL
Dana P. Nickell
Vice President, Finance and
Administration,
Chief Financial Officer and
Secretary
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 2 to the Registration Statement has been signed by the
following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ---------------------------------------- ------------------------------------ -------------
<C> <S> <C>
MICHAEL R. HENSON* President, Chief Executive Officer June 6, 1996
(Michael R. Henson) (Principal Executive Officer) and
Chairman
/s/ DANA P. NICKELL Vice President, Finance and June 6, 1996
(Dana P. Nickell) Administration, Chief Financial
Officer and Secretary (Principal
Financial and Accounting Officer)
WILLIAM G. DAVIS* Director June 6, 1996
(William G. Davis)
MITCHELL DANN* Director June 6, 1996
(Mitchell Dann)
GERARD VON HOFFMAN* Director June 6, 1996
(Gerard von Hoffman)
EDWARD M. LEONARD* Director June 6, 1996
(Edward M. Leonard)
*By:/s/ DANA P. NICKELL
(Dana P. Nickell, Attorney-in-Fact)
</TABLE>
II-4
<PAGE> 79
CARDIOVASCULAR DYNAMICS, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(IN THOUSANDS)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ------------------------------------------ ----------- ---------------------- --------- ----------
ADDITIONS
----------------------
BALANCE AT CHARGES TO CHARGED BALANCE AT
BEGINNING COST AND TO OTHER END
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD
- ------------------------------------------ ---------- ---------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1995
Allowance for doubtful accounts......... $ 85 $ 95 $ -- $ -- $180
Accrued warranty expenses............... $ 20 $ 93 $ -- $ -- $113
YEAR ENDED DECEMBER 31, 1994
Allowance for doubtful accounts......... $ -- $ 85 $ -- $ -- $ 85
Accrued warranty expenses............... $ -- $ 20 $ -- $ -- $ 20
YEAR ENDED DECEMBER 31, 1993
Allowance for doubtful accounts......... $ -- $ -- $ -- $ -- $ --
Accrued warranty expenses............... $ -- $ -- $ -- $ -- $ --
</TABLE>
S-1
<PAGE> 80
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION PAGE
- --------- ------------------------------------------------------------------- ------------
<C> <S> <C>
1.1 Form of Underwriting Agreement.....................................
2.1(2) Agreement and Plan of Reorganization dated as of June 9, 1993 among
EndoSonics Corporation ("EndoSonics"), EndoSonics Acquisition
Corporation and CardioVascular Dynamics, Inc. ("CVD")..............
2.2(2) First Amendment dated as of June 30, 1993 to the Agreement and Plan
of Reorganization among EndoSonics, EndoSonics Acquisition
Corporation and CVD................................................
3.1(2) Certificate of Incorporation.......................................
3.2(2) Amended Bylaws.....................................................
4.1 Specimen Certificate of Common Stock...............................
5.1 Opinion of Brobeck, Phleger & Harrison LLP.........................
10.1(2) Form of Indemnification Agreement to be entered into between the
Registrant and its directors and officers..........................
10.2(2) The Registrant's 1996 Stock Option Plan and forms of agreements
thereunder.........................................................
10.3(2) The Registrant's Employee Stock Purchase Plan and forms of
agreement thereunder...............................................
10.4(2) Series A Supplemental Stock Purchase Agreement dated June 5, 1992,
by and between the Company and CVD.................................
10.5(2) Stock Purchase Option Agreement dated June 5, 1992, by and between
EndoSonics and CVD.................................................
10.6*(2) Japanese Distribution Agreement dated May 28, 1993, as amended on
October 27, 1994 and July 17, 1995, (the "Japanese Distribution
Agreements") by and between CVD and Fukuda Denshi Co., Ltd.
("Fukuda").........................................................
10.7*(2) Stock Purchase and Technology License Agreement dated September 10,
1994, as amended on September 29, 1995, by and among EndoSonics,
CVD and SCIMED Life Systems, Inc. ("SCIMED").......................
10.8(2) Waiver and Grant of Warrant dated June 30, 1995 by and between
SCIMED, CVD and EndoSonics.........................................
10.9*(2) License Agreement dated January 15, 1995 by and between CVD and
Advanced Cardiovascular Systems, Inc. ("ACS")......................
10.10*(2) License Agreement dated March 4, 1996 by and between CVD and ACS...
10.11(2) Series B Stock Purchase Agreement dated March 29, 1996 by and
between CVD and EndoSonics.........................................
10.12(2) License Agreement dated December 22, 1995 by and between CVD and
EndoSonics.........................................................
10.13 Form of Stockholder Agreement with EndoSonics......................
10.14 Form of Tax Allocation Agreement with EndoSonics...................
10.15(2) Industrial Lease dated February 23, 1995 by and between the Irvine
Company and CVD....................................................
10.16 Waiver and Grant of Warrant dated May 2, 1996 by and between
SCIMED, CVD and EndoSonics.........................................
10.17(1) Amendment to Japanese Distribution Agreements dated May 13, 1996 by
and between CVD and Fukuda.........................................
11.1 Computation of Earnings Per Share..................................
</TABLE>
<PAGE> 81
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION PAGE
- --------- ------------------------------------------------------------------- ------------
<C> <S> <C>
23.1 Consent of Ernst & Young LLP, Independent Auditors.................
23.2 Consent of Brobeck, Phleger & Harrison LLP. Reference is made to
Exhibit 5.1........................................................
24.1(2) Power of Attorney. ................................................
27.1(1) Financial Data Schedule............................................
</TABLE>
- ---------------
* Confidential treatment requested.
(1) Previously filed as an exhibit to Amendment No. 1 to the Company's
Registration Statement on Form S-1 filed with the Securities and Exchange
Commission on May 17, 1996.
(2) Previously filed as an exhibit to the Company's Registration Statement on
Form S-1 filed with the Securities and Exchange Commission on May 3, 1996.
<PAGE> 1
EXHIBIT 1.1
3,400,000 Shares(1)
CARDIOVASCULAR DYNAMICS, INC.
Common Stock
UNDERWRITING AGREEMENT
Volpe, Welty & Company
Wessels, Arnold & Henderson
Vector Securities International, Inc.
As Representatives of the several Underwriters
c/o Volpe, Welty & Company
One Maritime Plaza, 11th Floor
San Francisco, California 94111
Dear Sirs and Madams:
CardioVascular Dynamics, Inc., a Delaware corporation (the "Company"),
proposes to issue and sell 3,400,000 shares (the "Firm Shares") of its
authorized but unissued Common Stock, $0.001 par value (the "Common Stock"). The
Company proposes to grant to the Underwriters (as defined below) an option to
purchase up to 510,000 additional shares of Common Stock (the "Optional Shares"
and, with the Firm Shares, collectively, the "Shares"). The Common Stock is more
fully described in the Registration Statement and the Prospectus hereinafter
mentioned. EndoSonics Corporation, a Delaware corporation, is hereinafter
referred to as the "Principal Securityholder."
The Company hereby confirms the agreements made with respect to the
purchase of the shares by the several underwriters, for whom you are acting,
named in Schedule I hereto (collectively, the "Underwriters," which term shall
also include any underwriter purchasing Stock pursuant to Section 3(b) hereof).
You represent and warrant that you have been authorized by each of the other
Underwriters to enter into this Agreement on its behalf and to act for it in the
manner herein provided.
SECTION 1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
hereby represents and warrants to the several Underwriters as of the date hereof
and as of each Closing Date (as defined below) that:
(a) The Company has filed with the Securities and Exchange
Commission (the "Commission") a registration statement on Form S-1 (No.
333-4560), including the related preliminary
- -------------------
(1) Plus an option to purchase from the Company up to 510,000 additional
shares to cover over-allotments.
<PAGE> 2
prospectus, for the registration under the Securities Act of 1933, as amended
(the "Securities Act") of the Shares. Copies of such registration statement and
of each amendment thereto, if any, including the related preliminary prospectus
(meeting the requirements of Rule 430A of the rules and regulations of the
Commission) heretofore filed by the Company with the Commission have been
delivered to you.
The term Registration Statement as used in this agreement shall mean
such registration statement, including all exhibits and financial statements,
all information omitted therefrom in reliance upon Rule 430A and contained in
the Prospectus referred to below, in the form in which it became effective, and
any registration statement filed pursuant to Rule 462(b) of the rules and
regulations of the Commission with respect to the shares (a "Rule 462(b)
registration statement"), and, in the event of any amendment thereto after the
effective date of such registration statement (the "Effective Date"), shall also
mean (from and after the effectiveness of such amendment) such registration
statement as so amended (including any Rule 462(b) registration statement). The
term Prospectus as used in this Agreement shall mean the prospectus relating to
the Shares first filed with the Commission pursuant to Rule 424(b) and Rule 430A
(or if no such filing is required, as included in the Registration Statement)
and, in the event of any supplement or amendment to such prospectus after the
Effective Date, shall also mean (from and after the filing with the Commission
of such supplement or the effectiveness of such amendment) such prospectus as so
supplemented or amended. The term Preliminary Prospectus as used in this
Agreement shall mean each preliminary prospectus included in such registration
statement prior to the time it becomes effective.
The Registration Statement has been declared effective under the
Securities Act, and no post-effective amendment to the Registration Statement
has been filed as of the date of this Agreement. The Company has caused to be
delivered to you copies of each Preliminary Prospectus and has consented to the
use of such copies for the purposes permitted by the Securities Act.
(b) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the jurisdiction of
its incorporation, has full corporate power and authority to own or lease its
properties and conduct its business as described in the Registration Statement
and the Prospectus and as being conducted, and is duly qualified as a foreign
corporation and in good standing in all jurisdictions in which the character of
the property owned or leased or the nature of the business transacted by it
makes qualification necessary (except where the failure to be so qualified would
not have a material adverse effect on the business, business prospects,
properties, condition (financial or otherwise) or results of operations of the
Company).
(c) The Company does not own or control, directly or
indirectly, any corporation, association or other entity. The Company is in
possession of and operating in compliance with all material authorizations,
licenses, permits, consents, certificates and orders material to the conduct of
its businesses as described in the Prospectus, all of which are valid and in
full force and effect.
(d) Since the respective dates as of which information is
given in the Registration Statement and the Prospectus, there has not been any
materially adverse change in the business, business prospects, properties,
condition (financial or otherwise) or results of operations of the Company,
whether or not arising from transactions in the ordinary course of business,
other than as set forth in the Registration Statement and the Prospectus, and
since such dates, except in the ordinary course of business,
<PAGE> 3
the Company has not entered into any material transaction not referred to in the
Registration Statement and the Prospectus.
(e) The Registration Statement and the Prospectus comply, and
on the Closing Date (as hereinafter defined) and any later date on which
Optional Shares are to be purchased, the Prospectus will comply, in all material
respects, with the provisions of the Securities Act and the rules and
regulations of the Commission thereunder; on the Effective Date, the
Registration Statement did not contain any untrue statement of a material fact
and did not omit to state any material fact required to be stated therein or
necessary in order to make the statements therein not misleading; and, on the
Effective Date the Prospectus did not and, on the Closing Date and any later
date on which Optional Shares are to be purchased, will not contain any untrue
statement of a material fact or omit to state any material fact necessary in
order to make the statements therein, in the light of the circumstances under
which they were made, not misleading; provided, however, that none of the
representations and warranties in this subparagraph (iii) shall apply to
statements in, or omissions from, the Registration Statement or the Prospectus
made in reliance upon and in conformity with information herein or otherwise
furnished in writing to the Company by or on behalf of the Underwriters for use
in the Registration Statement or the Prospectus.
(f) The Company has authorized and outstanding capital stock
as set forth under the heading "Capitalization" in the Prospectus. The issued
and outstanding shares of Common Stock have been duly authorized and validly
issued, are fully paid and nonassessable, have been issued in compliance with
all federal and state securities laws, and were not issued in violation of or
subject to any preemptive rights or other rights to subscribe for or purchase
securities. Except as disclosed in or contemplated by the Prospectus and the
financial statements of the Company and the related notes thereto included in
the Prospectus, the Company has no outstanding options to purchase, or any
preemptive rights or other rights to subscribe for or to purchase, any
securities or obligations convertible into, or any contracts or commitments to
issue or sell, shares of its capital stock or any such options, rights,
convertible securities or obligations. The description of the Company's stock
option, stock bonus and other stock plans or arrangements, and the options or
other rights granted and exercised thereunder, set forth in the Prospectus
accurately and fairly presents the information required by the Securities Act
and the Rules and Regulations to be shown with respect to such plans,
arrangements, options and rights.
(g) The Shares are duly authorized, are (or, in the case of
Shares to be sold by the Company, will be, when issued and sold to the
Underwriters as provided herein) validly issued, fully paid and nonassessable
and conform to the description thereof in the Prospectus. No further approval or
authority of the stockholders or the Board of Directors of the Company will be
required for issuance and sale of the Shares to be sold by the Company as
contemplated herein.
(h) The Shares to be issued and sold by the Company will be
authorized for listing on the Nasdaq National Market upon official notice of
issuance.
(i) The Shares to be sold by the Company will be sold free and
clear of any pledge, lien, security interest, encumbrance, claim or equitable
interest, and will conform to the description thereof contained in the
Prospectus. No preemptive right, co-sale right, registration right, right of
first refusal or other similar right to subscribe for or purchase securities of
the Company exists with respect to the issuance and sale of the Shares by the
Company pursuant to this Agreement. No stockholder of the Company has
<PAGE> 4
any right which has not been waived, or complied with, to require the Company to
register the sale of any shares owned by such stockholder under the Securities
Act in the public offering contemplated by this Agreement.
(j) The Company has full corporate power and authority to
enter into this Agreement and perform the transactions contemplated hereby. This
Agreement has been duly authorized, executed and delivered by the Company and
constitutes a valid and binding obligation of the Company enforceable in
accordance with its terms, except as enforceability may be limited by general
equitable principles, bankruptcy, insolvency, reorganization, moratorium laws
affecting creditors' rights generally and except as to those provisions relating
to indemnity or contribution for liabilities arising under federal and state
securities laws. The making and performance of this Agreement by the Company and
the consummation of the transactions contemplated hereby (i) will not violate
any provisions of the Certificate of Incorporation, Bylaws or other
organizational documents of the Company, and (ii) will not conflict with, result
in a material breach or violation of, or constitute, either by itself or upon
notice or the passage of time or both, a material default under (A) any
agreement, mortgage, deed of trust, lease, franchise, license, indenture, permit
or other instrument to which the Company is a party or by which the Company or
any of its properties may be bound or affected, or (B) any statute or any
authorization, judgment, decree, order, rule or regulation of any court or any
regulatory body, administrative agency or other governmental body applicable to
the Company or any its properties. No consent, approval, authorization or other
order of any court, regulatory body, administrative agency or other governmental
body that has not already been obtained is required for the execution and
delivery of this Agreement or the consummation of the transactions contemplated
by this Agreement, except for compliance with the Securities Act, the blue sky
laws applicable to the public offering of the Common Shares by the several
Underwriters and the clearance of such offering with the NASD.
(k) The financial statements and schedules of the Company and
the related notes thereto included in the Registration Statement and the
Prospectus present fairly the financial position of the Company as of the
respective dates of such financial statements and schedules, and the results of
operations and cash flows of the Company for the respective periods covered
thereby. Such statements, schedules and related notes have been prepared in
accordance with generally accepted accounting principles applied on a consistent
basis throughout the periods specified, as certified by the independent
accountants named in subsection 3(g). No other financial statements or schedules
are required to be included in the Registration Statement. The selected
financial data set forth in the Prospectus under the captions "Capitalization"
and "Selected Consolidated Financial Information" fairly present the information
set forth therein on the basis stated in the Registration Statement.
(l) The Company maintains a system of internal accounting
controls sufficient to provide reasonable assurances that (i) transactions are
executed in accordance with management's general or specific authorizations,
(ii) transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain accountability for assets, (iii) access to assets is permitted only in
accordance with management's general or specific authorization, and (iv) the
recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences. The representations and warranties given by the Company and its
officers to its independent public accountants for the purpose of supporting the
letters referred to in Sections 10(f) and 10(g) are true and correct.
<PAGE> 5
(m) The Company is not (i) in violation or default of any
provision of its Certificate of Incorporation, Bylaws or other organizational
documents, or (ii) in a material breach of or default with respect to any
provision of any agreement, judgment, decree, order, mortgage, deed of trust,
lease, franchise, license, indenture, permit or other instrument to which it is
a party or by which it or any of its properties are bound; and there does not
exist any state of facts which, with notice or lapse of time or both would
constitute such a breach or default on the part of the Company.
(N) There are no contracts or other documents required to be
described in the Registration Statement or to be filed as exhibits to the
Registration Statement by the Securities Act or by the Rules and Regulations
which have not been described or filed as required. The contracts so described
in the Prospectus are in full force and effect on the date hereof.
(o) Except as disclosed in the Prospectus, there are no legal
or governmental actions, suits or proceedings pending or threatened to which the
Company is or is threatened to be made a party or of which property owned or
leased by the Company is or is threatened to be made the subject, which actions,
suits or proceedings could, individually or in the aggregate, prevent or
adversely affect the transactions contemplated by this Agreement or result in a
material adverse change in the business, business prospects, properties,
condition (financial or otherwise), or results of operations of the Company; and
no labor disturbance by the employees of the Company exists or is imminent which
could materially adversely affect the business, business prospects, properties,
condition (financial or otherwise), or results of operations of the Company. The
Company is not a party or subject to the provisions of any material injunction,
judgment, decree or order of any court, regulatory body, administrative agency
or other governmental body. Except as disclosed in the Prospectus, there are no
material legal or governmental actions, suits or proceedings pending or, to the
Company's knowledge, threatened against any executive officers or directors of
the Company.
(p) The Company has good and marketable title to all the
properties and assets reflected as owned in the financial statements hereinabove
described (or elsewhere in the Prospectus), subject to no lien, mortgage,
pledge, charge or encumbrance of any kind except (i) those, if any, reflected in
such financial statements (or elsewhere in the Prospectus), or (ii) those which
are not material in amount to the Company, and do not adversely affect the use
made and proposed to be made of such property by the Company. The Company holds
its leased properties under valid and binding leases. Except as disclosed in the
Prospectus, the Company owns or leases all such properties as are necessary to
its operations as now conducted or as proposed to be conducted.
(q) Since the respective dates as of which information is
given in the Registration Statement and Prospectus, and except as described in
or specifically contemplated by the Prospectus: (i) the Company has not (A)
incurred any liabilities or obligations, indirect, direct or contingent, or (B)
entered into any oral or written agreement or other transaction, which in the
case of (A) or (B) is not in the ordinary course of business; (ii) the Company
has not sustained any material loss or interference with its business or
properties from fire, flood, windstorm, accident or other calamity, whether or
not covered by insurance; (iii) the Company has not paid or declared any
dividends or other distributions with respect to its respective capital stock
and the Company and its subsidiaries are not in default in the payment of
principal or interest on any outstanding debt obligations; (iv) there has not
been any change in the capital stock of the Company (other than upon the sale of
the Shares hereunder or upon the exercise of any options or
<PAGE> 6
warrants disclosed in the Prospectus); (v) there has not been any material
increase in the short- or long-term debt of the Company; and (vi) there has not
been any material adverse change or any development involving or which may
reasonably be expected to involve a prospective material adverse change, in the
business, business prospects, condition (financial or otherwise), properties, or
results of operations of the Company.
(r) The Company is conducting business in compliance with all
applicable laws, rules and regulations of the jurisdictions in which it is
conducting business, except where the failure to be so in compliance would not
have a material adverse effect on the business, business prospects, properties,
condition (financial or otherwise) or results of operations of the Company.
(s) The Company has filed all necessary federal, state and
foreign income and franchise tax returns, and all such tax returns are complete
and correct in all material respects, and the Company has not failed to pay any
taxes which were payable pursuant to said returns or any assessments with
respect thereto. The Company has no knowledge of any tax deficiency which has
been or is likely to be threatened or asserted against the Company.
(t) The Company has not distributed, and will not distribute
prior to the later to occur of (i) completion of the distribution of the Shares,
or (ii) the expiration of any time period within which a dealer is required
under the Securities Act to deliver a prospectus relating to the Shares, any
offering material in connection with the offering and sale of the Shares other
than the Prospectus, the Registration Statement and any other materials
permitted by the Securities Act and consented to by the Underwriters.
(u) The Company maintains insurance of the types and in the
amounts generally deemed adequate for its business, including, but not limited
to, directors' and officers' insurance, insurance covering real and personal
property owned or leased by the Company against theft, damage, destruction, acts
of vandalism and all other risks customarily insured against, all of which
insurance is in full force and effect. The Company has not been refused any
insurance coverage sought or applied for, and the Company has no reason to
believe that it will not be able to renew its existing insurance coverage as and
when such coverage expires or to obtain similar coverage from similar insurers
as may be necessary to continue its business at a cost that would not materially
adversely affect the business, business prospects, properties, condition
(financial or otherwise) or results of operations of the Company.
(v) The Company is not and, to the best of the Company's
knowledge, none of the Company's employees or agents has at any time during the
last five years (i) made any unlawful contribution to any candidate for foreign
office, or failed to disclose fully any contribution in violation of law, or
(ii) made any payment to any foreign, federal or state governmental officer or
official or other person charged with similar public or quasi-public duties,
other than payments required or permitted by the laws of the United States or
any jurisdiction thereof.
(w) The Company has not taken and will not take, directly or
indirectly, any action designed to or that might be reasonably expected to cause
or result in stabilization or manipulation of the price of the Common Stock to
facilitate the sale or resale of the Shares.
<PAGE> 7
(x) The Company has caused (i) each of its executive officers and
directors as set forth in the Prospectus and (ii) each holder of the outstanding
Common Stock (including shares issuable upon the exercise or conversion of any
option, warrant or other security) to furnish to the Underwriters an agreement
in form and substance satisfactory to Volpe, Welty & Company pursuant to which
each such party has agreed that during the period of one hundred eighty (180)
days after the date the Registration Statement becomes effective, without the
prior written consent of Volpe, Welty & Company, such party will not (i) offer,
sell, contract to sell, make any short sale (including without limitation short
against the box), pledge or otherwise dispose of, directly or indirectly, any
shares of the Company's Common Stock, options to acquire Common Stock or
securities convertible into or exchangeable for, or any other rights to purchase
or acquire, the Company's Common Stock (including, without limitation, Common
Stock of the Company which may be deemed to be beneficially owned in accordance
with the rules and regulations of the Commission) other than the exercise or
conversion of outstanding options, warrants or convertible securities; or (ii)
enter into any swap or other agreement that transfers, in whole or in part, any
of the economic consequences or ownership of Common Stock, whether any such
transaction described in (i) or (ii) is to be settled by delivery of Common
Stock or such other securities, in cash or otherwise provided, however, that
bona fide gift transactions and transfers which will not result in any change in
beneficial ownership may be permitted if the transferee enters into a lock-up
agreement in substantially the same form covering the remainder of the lock-up
period.
(y) Neither the Company nor any of its affiliates does
business with the government of Cuba or with any person or affiliate located in
Cuba.
(z) Except as specifically disclosed in the Prospectus, the
Company has sufficient trademarks, trade names, patent rights, copyrights,
licenses, approvals and governmental authorizations to conduct their businesses
as now conducted; the expiration of any trademarks, trade names, patent rights,
copyrights, licenses, approvals or governmental authorizations would not have a
material adverse effect on the business, business prospects, properties,
condition (financial or otherwise) or results of operations have been of the
Company; the Company has no knowledge of any infringement by the Company of
trademark, trade name rights, patent rights, copyrights, licenses, trade secret
or other similar rights of others; and no claims have been made or are
threatened against the Company regarding trademark, trade name, patent,
copyright, license, trade secret or other infringement which could have a
material adverse effect on the business, business prospects, properties,
condition (financial or otherwise) or results of operations or prospects of the
Company.
(aa) Except as disclosed in the Prospectus, (i) the Company is
in compliance in all material respects with all rules, laws and regulation
relating to the use, treatment, storage and disposal of toxic substances and
protection of health or the environment ("Environmental Laws") which are
applicable to its business, (ii) the Company has not received any notice from
any governmental authority or third party of an asserted claim under
Environmental Laws, (iii) no facts currently exist that will require the Company
to make future material capital expenditures to comply with Environmental Laws,
and (iv) to the knowledge of the Company, no property which is or has been
owned, leased or occupied by the Company has been designated as a Superfund site
pursuant to the Comprehensive Environmental Response, Compensation and Liability
Act of 1980, as amended (42 U.S.C. Section 9601, et seq.), or otherwise
designated as a contaminated site under applicable state or local law.
<PAGE> 8
(bb) The Company is not an "investment company" within the
meaning of the Investment Company Act of 1940, as amended.
SECTION 2. REPRESENTATION AND WARRANTY OF THE PRINCIPAL
SECURITYHOLDER. The Principal Securityholder hereby represents and warrants to
the several Underwriters as of the date hereof and as of each Closing Date that:
(a) The Registration Statement and the Prospectus comply, and
on the Closing Date (as hereinafter defined) and any later date on which
Optional Shares are to be purchased, the Prospectus will comply, in all material
respects, with the provisions of the Securities Act and the rules and
regulations of the Commission thereunder; on the Effective Date, the
Registration Statement did not contain any untrue statement of a material fact
and did not omit to state any material fact required to be stated therein or
necessary in order to make the statements therein not misleading; and, on the
Effective Date the Prospectus did not and, on the Closing Date and any later
date on which Optional Shares are to be purchased, will not contain any untrue
statement of a material fact or omit to state any material fact necessary in
order to make the statements therein, in the light of the circumstances under
which they were made, not misleading; provided, however, that none of the
representations and warranties in this subparagraph (iii) shall apply to
statements in, or omissions from, the Registration Statement or the Prospectus
made in reliance upon and in conformity with information herein or otherwise
furnished in writing to the Company by or on behalf of the Underwriters for use
in the Registration Statement or the Prospectus.
SECTION 3. PURCHASE OF THE SHARES BY THE UNDERWRITERS.
(a) On the basis of the representations and warranties and
subject to the terms and conditions herein set forth, the Company agrees to
issue and sell 3,400,000 of the Firm Shares to the several Underwriters, and
each of the Underwriters agrees to purchase from the Company the respective
aggregate number of Firm Shares set forth opposite its name in Schedule I. The
price at which such Firm Shares shall be sold by the Company and purchased by
the several Underwriters shall be $___ per share. The obligation of each
Underwriter to the Company shall be to purchase from the Company that number of
Firm Shares which represents the same proportion of the total number of Firm
Shares to be sold by each of the Company pursuant to this Agreement as the
number of Firm Shares set forth opposite the name of such Underwriter in
Schedule I hereto represents of the total number of shares of the Firm Shares to
be purchased by all Underwriters pursuant to this Agreement, as adjusted by you
in such manner as you deem advisable to avoid fractional shares. In making this
Agreement, each Underwriter is contracting severally and not jointly; except as
provided in paragraphs (b) and (c) of this Section 3, the agreement of each
Underwriter is to purchase only the respective number of shares of the Firm
Shares specified in Schedule I.
(b) If for any reason one or more of the Underwriters shall
fail or refuse (otherwise than for a reason sufficient to justify the
termination of this Agreement under the provisions of Section 9 or 10 hereof) to
purchase and pay for the number of Shares agreed to be purchased by such
Underwriter or Underwriters, the Company shall immediately give notice thereof
to you, and the non-defaulting Underwriters shall have the right within 24 hours
after the receipt by you of such notice to purchase, or procure one or more
other Underwriters to purchase, in such proportions as may be agreed upon
between you and such purchasing Underwriter or Underwriters and upon the terms
herein set forth, all or any part
<PAGE> 9
of Shares which such defaulting Underwriter or Underwriters agreed to purchase.
If the non-defaulting Underwriters fail so to make such arrangements with
respect to all such shares and portion, the number of Shares which each
non-defaulting Underwriter is otherwise obligated to purchase under this
Agreement shall be automatically increased on a pro rata basis to absorb the
remaining shares and portion which the defaulting Underwriter or Underwriters
agreed to purchase; provided, however, that the non-defaulting Underwriters
shall not be obligated to purchase the portion which the defaulting Underwriter
or Underwriters agreed to purchase if the aggregate number of such Shares
exceeds 10% of the total number of Shares which all Underwriters agreed to
purchase hereunder. If the total number of Shares which the defaulting
Underwriter or Underwriters agreed to purchase shall not be purchased or
absorbed in accordance with the two preceding sentences, the Company shall have
the right, within 24 hours next succeeding the 24-hour period above referred to,
to make arrangements with other underwriters or purchasers satisfactory to you
for purchase of such Shares and portion on the terms herein set forth. In any
such case, either you or the Company shall have the right to postpone the
Closing Date determined as provided in Section 5 hereof for not more than seven
business days after the date originally fixed as the Closing Date pursuant to
Section 5 in order that any necessary changes in the Registration Statement, the
Prospectus or any other documents or arrangements may be made. If neither the
non-defaulting Underwriters nor the Company shall make arrangements within the
24-hour periods stated above for the purchase of all of the Shares which the
defaulting Underwriter or Underwriters agreed to purchase hereunder, this
Agreement shall be terminated without further act or deed and without any
liability on the part of the Company to any non-defaulting Underwriter and
without any liability on the part of any non-defaulting Underwriter to the
Company. Nothing in this paragraph (b), and no action taken hereunder, shall
relieve any defaulting Underwriter from liability in respect of any default of
such Underwriter under this Agreement.
(c) On the basis of the representations, warranties and
covenants herein contained, and subject to the terms and conditions herein set
forth, the Company grants an option to the several Underwriters to purchase,
severally and not jointly, up to 510,000 Optional Shares from the Company at the
same price per share as the Underwriters shall pay for the Firm Shares. Said
option may be exercised only to cover over-allotments in the sale of the Firm
Shares by the Underwriters and may be exercised in whole or in part at any time
on or before the thirtieth day after the date of this Agreement upon written or
telegraphic notice by you to the Company setting forth the aggregate number of
Optional Shares as to which the several Underwriters are exercising the option.
Delivery of certificates for the Optional Shares, and payment therefor, shall be
made as provided in Section 5 hereof. The number of Optional Shares to be
purchased by each Underwriter shall be the same percentage of the total number
of Optional Shares to be purchased by the several Underwriters as such
Underwriter is purchasing of the Firm Shares, as adjusted by you in such manner
as you deem advisable to avoid fractional shares.
SECTION 4. OFFERING BY UNDERWRITERS.
(a) The terms of the initial public offering by the
Underwriters of the Shares to be purchased by them shall be as set forth in the
Prospectus. The Underwriters may from time to time change the public offering
price after the closing of the initial public offering and increase or decrease
the concessions and discounts to dealers as they may determine.
<PAGE> 10
(b) The information (insofar as such information relates to
the Underwriters) set forth in the last paragraph on the front cover page and
under "Underwriting" in the Registration Statement, any Preliminary Prospectus
and the Prospectus relating to the Shares constitutes the only information
furnished by the Underwriters to the Company for inclusion in the Registration
Statement, any Preliminary Prospectus, and the Prospectus, and you on behalf of
the respective Underwriters represent and warrant to the Company that the
statements made therein are correct.
SECTION 5. DELIVERY OF AND PAYMENT FOR THE SHARES.
(a) Delivery of certificates for the Firm Shares and the
Optional Shares (if the option granted by Section 3(c) hereof shall have been
exercised not later than 7:00 A.M., San Francisco time, on the date two business
days preceding the Closing Date), and payment therefor, shall be made at the
office of Brobeck, Phleger & Harrison LLP, 2200 Geng Road, Palo Alto,
California, at 7:00 a.m., San Francisco time, on the [fourth](2) business day
after the date of this Agreement, or at such time on such other day, not later
than seven full business days after such [fourth] business day, as shall be
agreed upon in writing by the Company, and you. The date and hour of such
delivery and payment (which may be postponed as provided in Section 4(b) hereof)
are herein called the "Closing Date".
(b) If the option granted by Section 3(c) hereof shall be
exercised after 7:00 a.m., San Francisco time, on the date two business days
preceding the Closing Date, delivery of certificates for the shares of Optional
Shares, and payment therefor, shall be made at the office of Brobeck, Phleger &
Harrison LLP, 2200 Geng Road, Palo Alto, California, at 7:00 a.m., San Francisco
time, on the third business day after the exercise of such option.
(c) Payment for the shares purchased from the Company shall be
made to the Company or its order, by (i) one or more certified or official bank
check or checks in next day funds (and the Company agrees not to deposit any
such check in the bank on which drawn until the day following the date of its
delivery to the Company or the Custodian, as the case may be) or (ii) federal
funds wire transfer. Such payment shall be made upon delivery of certificates
for the shares to you for the respective accounts of the several Underwriters
(including without limitation by "full-fast" electronic transfer by Depository
Trust Company) against receipt therefor signed by you. Certificates for the
shares to be delivered to you shall be registered in such name or names and
shall be in such denominations as you may request at least one business day
before the Closing Date, in the case of Firm Shares, and at least one business
day prior to the purchase thereof, in the case of the Optional Shares. Such
certificates will be made available to the Underwriters for inspection, checking
and packaging at the offices of agent of Volpe, Welty & Company's clearing
agent, Bear Sterns Securities Corp., on the business day prior to the Closing
Date or, in the case of the Optional Shares, by 3:00 p.m., New York time, on the
business day preceding the date of purchase.
It is understood that you, individually and not on behalf of
the Underwriters, may (but shall not be obligated to) make payment to the
Company for shares to be purchased by any Underwriter whose
- -------------------
(2) This assumes that the transaction will be priced after the close of market
and that T + 4 will apply to the transaction. If the pricing takes place before
or during market hours the closing will be three business days after pricing.
<PAGE> 11
check shall not have been received by you on the Closing Date or any later date
on which Optional Shares are purchased for the account of such Underwriter. Any
such payment by you shall not relieve such Underwriter from any of its
obligations hereunder.
SECTION 6. COVENANTS OF THE COMPANY. The Company covenants and
agrees as follows:
(a) The Company will (i) prepare and timely file with the
Commission under Rule 424(b) a Prospectus containing information previously
omitted at the time of effectiveness of the Registration Statement in reliance
on Rule 430A and (ii) not file any amendment to the Registration Statement or
supplement to the Prospectus of which you shall not previously have been advised
and furnished with a copy or to which you shall have reasonably objected in
writing or which is not in compliance with the Securities Act or the rules and
regulations of the Commission.
(b) The Company will promptly notify each Underwriter in the
event of (i) the request by the Commission for amendment of the Registration
Statement or for supplement to the Prospectus or for any additional information,
(ii) the issuance by the Commission of any stop order suspending the
effectiveness of the Registration Statement, (iii) the institution or notice of
intended institution of any action or proceeding for that purpose, (iv) the
receipt by the Company of any notification with respect to the suspension of the
qualification of the shares for sale in any jurisdiction, or (v) the receipt by
it of notice of the initiation or threatening of any proceeding for such
purpose. The Company will make every reasonable effort to prevent the issuance
of such a stop order and, if such an order shall at any time be issued, to
obtain the withdrawal thereof at the earliest possible moment.
(c) The Company will (i) on or before the Closing Date,
deliver to you a signed copy of the Registration Statement as originally filed
and of each amendment thereto filed prior to the time the Registration Statement
becomes effective and, promptly upon the filing thereof, a signed copy of each
post-effective amendment, if any, to the Registration Statement (together with,
in each case, all exhibits thereto unless previously furnished to you) and will
also deliver to you, for distribution to the Underwriters, a sufficient number
of additional conformed copies of each of the foregoing (but without exhibits)
so that one copy of each may be distributed to each Underwriter, (ii) as
promptly as possible deliver to you and send to the several Underwriters, at
such office or offices as you may designate, as many copies of the Prospectus as
you may reasonably request, and (iii) thereafter from time to time during the
period in which a prospectus is required by law to be delivered by an
Underwriter or dealer, likewise send to the Underwriters as many additional
copies of the Prospectus and as many copies of any supplement to the Prospectus
and of any amended prospectus, filed by the Company with the Commission, as you
may reasonably request for the purposes contemplated by the Securities Act.
(d) If at any time during the period in which a prospectus is
required by law to be delivered by an Underwriter or dealer any event relating
to or affecting the Company, or of which the Company shall be advised in writing
by you, shall occur as a result of which it is necessary, in the opinion of
counsel for the Company or of counsel for the Underwriters, to supplement or
amend the Prospectus in order to make the Prospectus not misleading in the light
of the circumstances existing at the time it is delivered to a purchaser of the
shares, the Company will forthwith prepare and file with the Commission a
supplement to the Prospectus or an amended prospectus so that the Prospectus as
so supplemented or amended will not contain any untrue statement of a material
fact or omit to state any material fact necessary
<PAGE> 12
in order to make the statements therein, in the light of the circumstances
existing at the time such Prospectus is delivered to such purchaser, not
misleading. If, after the initial public offering of the shares by the
Underwriters and during such period, the Underwriters shall propose to vary the
terms of offering thereof by reason of changes in general market conditions or
otherwise, you will advise the Company in writing of the proposed variation,
and, if in the opinion either of counsel for the Company or of counsel for the
Underwriters such proposed variation requires that the Prospectus be
supplemented or amended, the Company will forthwith prepare and file with the
Commission a supplement to the Prospectus or an amended prospectus setting forth
such variation. The Company authorizes the Underwriters and all dealers to whom
any of the shares may be sold by the several Underwriters to use the Prospectus,
as from time to time amended or supplemented, in connection with the sale of the
shares in accordance with the applicable provisions of the Securities Act and
the applicable rules and regulations thereunder for such period.
(e) Prior to the filing thereof with the Commission, the
Company will submit to you, for your information, a copy of any post-effective
amendment to the Registration Statement and any supplement to the Prospectus or
any amended prospectus proposed to be filed.
(f) The Company will cooperate, when and as requested by you,
in the qualification of the shares for offer and sale under the securities or
blue sky laws of such jurisdictions as you may designate and, during the period
in which a prospectus is required by law to be delivered by an Underwriter or
dealer, in keeping such qualifications in good standing under said securities or
blue sky laws; provided, however, that the Company shall not be obligated to
file any general consent to service of process or to qualify as a foreign
corporation in any jurisdiction in which it is not so qualified. The Company
will, from time to time, prepare and file such statements, reports, and other
documents as are or may be required to continue such qualifications in effect
for so long a period as you may reasonably request for distribution of the
shares.
(g) During a period of five years commencing with the date
hereof, the Company will furnish to you, and to each Underwriter who may so
request in writing, copies of all periodic and special reports furnished to
stockholders of the Company and of all information, documents and reports filed
with the Commission (including the Report on Form SR required by Rule 463 of the
Commission under the Securities Act).
(h) Not later than the 45th day following the end of the
fiscal quarter first occurring after the first anniversary of the Effective
Date, the Company will make generally available to its security holders an
earnings statement in accordance with Section 11(a) of the Securities Act and
Rule 158 thereunder.
(i) The Company agrees to pay all costs and expenses incident
to the performance of its obligations under this Agreement, including all costs
and expenses incident to (i) the preparation, printing and filing with the
Commission and the National Association of Securities Dealers, Inc. ("NASD") of
the Registration Statement, any Preliminary Prospectus and the Prospectus, (ii)
the furnishing to the Underwriters and the persons designated by them of copies
of any Preliminary Prospectus and of the several documents required by paragraph
(c) of this Section 6 to be so furnished, (iii) the printing of this Agreement
and related documents delivered to the Underwriters, (iv) the preparation,
printing and filing of all supplements and amendments to the Prospectus referred
to in paragraph (d) of this Section 6, (v) the
<PAGE> 13
furnishing to you and the Underwriters of the reports and information referred
to in paragraph (g) of this Section 6 and (vi) the printing and issuance of
stock certificates, including the transfer agent's fees.
(j) The Company agrees to reimburse you, for the account of
the several Underwriters, for blue sky fees and related disbursements (including
counsel fees and disbursements and cost of printing memoranda for the
Underwriters) paid by or for the account of the Underwriters or their counsel in
qualifying the shares under state securities or blue sky laws and in the review
of the offering by the NASD.
(k) The provisions of paragraphs (i) and (j) of this Section
are intended to relieve the Underwriters from the payment of the expenses and
costs which the Company hereby agrees to pay and shall not affect any agreement
which the Company may make, or may have made, for the sharing of any such
expenses and costs.
(l) The Company hereby agrees that, without the prior written
consent of Volpe, Welty & Company, the Company will not, for a period of 180
days following the date the Registration Statement becomes effective, (i) offer,
sell, contract to sell, make any short sale (including without limitation short
against the box), pledge, or otherwise dispose of, directly or indirectly, any
shares of Common Stock or any options to acquire shares of Common Stock or
securities convertible into or exchangeable or exercisable for or any other
rights to purchase or acquire Common Stock (including without limitation, Common
Stock of the Company which may be deemed to be beneficially owned in accordance
with the rules and regulations of the Commission) other than the exercise or
conversion of outstanding options, warrants or convertible securities or (ii)
enter into any swap or other agreement that transfers, in whole or in part, any
of the economic consequences or ownership of Common Stock, whether any such
transaction described in clause (i) or (ii) above is to be settled by delivery
of Common Stock or such other securities, in cash or otherwise; provided,
however, that bona fide gift transactions and transfers which will not result in
any change in beneficial ownership may be permitted if the transferee enters
into a lock-up agreement in substantially the same form covering the remainder
of the lock-up period. The foregoing sentence shall not apply to (A) the shares
to be sold to the Underwriters pursuant to this Agreement, (B) shares of Common
Stock issued by the Company upon the exercise of options granted under the
option plans of the Company (the "Option Plans") or upon the exercise of
warrants outstanding as of the date hereof, all as described in footnote (1) to
the table under the caption "Capitalization" in the Preliminary Prospectus, and
(C) options to purchase Common Stock granted under the Option Plans.
(m) If at any time during the 25-day period after the
Registration Statement becomes effective any rumor, publication or event
relating to or affecting the Company shall occur as a result of which in your
opinion the market price for the shares has been or is likely to be materially
affected (regardless of whether such rumor, publication or event necessitates a
supplement to or amendment of the Prospectus), the Company will, after written
notice from you advising the Company to the effect set forth above, forthwith
prepare, consult with you concerning the substance of, and disseminate a press
release or other public statement, reasonably satisfactory to you, responding to
or commenting on such rumor, publication or event.
(n) The Company is familiar with the Investment Company Act of
1940, as amended, and has in the past conducted its affairs, and will in the
future conduct its affairs, in such a manner to ensure that the Company was not
and will not be an "investment company" or a company "controlled" by an
<PAGE> 14
"investment company" within the meaning of the Investment Company Act of 1940,
as amended, and the rules and regulations thereunder.
(o) The Company agrees to maintain directors' and officers'
insurance in amounts customary for the size and nature of the Company's business
for a period of two years from the date of this Agreement.
SECTION 7. INDEMNIFICATION AND CONTRIBUTION.
(a) The Company agrees to indemnify and hold harmless each
Underwriter and each person (including each partner or officer thereof) who
controls any Underwriter within the meaning of Section 15 of the Securities Act
from and against any and all losses, claims, damages or liabilities, joint or
several, to which such indemnified parties or any of them may become subject
under the Securities Act, the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), or the common law or otherwise, and the Company agrees to
reimburse each such Underwriter and controlling person for any legal or other
expenses (including, except as otherwise hereinafter provided, reasonable fees
and disbursements of counsel) incurred by the respective indemnified parties in
connection with defending against any such losses, claims, damages or
liabilities or in connection with any investigation or inquiry of, or other
proceeding which may be brought against, the respective indemnified parties, in
each case arising out of or based upon (i) any untrue statement or alleged
untrue statement of a material fact contained in the Registration Statement
(including the Prospectus as part thereof and any Rule 462(b) registration
statement) or any post-effective amendment thereto (including any Rule 462(b)
registration statement), or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, or (ii) any untrue statement or alleged untrue statement
of a material fact contained in any Preliminary Prospectus or the Prospectus (as
amended or as supplemented if the Company shall have filed with the Commission
any amendment thereof or supplement thereto) or the omission or alleged omission
to state therein a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading; provided, however, that (1) the indemnity agreements of the Company
contained in this paragraph (a) shall not apply to any such losses, claims,
damages, liabilities or expenses if such statement or omission was made in
reliance upon and in conformity with information furnished as herein stated or
otherwise furnished in writing to the Company by or on behalf of any Underwriter
for use in any Preliminary Prospectus or the Registration Statement or the
Prospectus or any such amendment thereof or supplement thereto and (2) the
indemnity agreement contained in this paragraph (a) with respect to any
Preliminary Prospectus shall not inure to the benefit of any Underwriter from
whom the person asserting any such losses, claims, damages, liabilities or
expenses purchased the shares which is the subject thereof (or to the benefit of
any person controlling such Underwriter) if at or prior to the written
confirmation of the sale of such Stock a copy of the Prospectus (or the
Prospectus as amended or supplemented) was not sent or delivered to such person
and the untrue statement or omission of a material fact contained in such
Preliminary Prospectus was corrected in the Prospectus (or the Prospectus as
amended or supplemented) unless the failure is the result of noncompliance by
the Company with paragraph (c) of Section 6 hereof. The indemnity agreements of
the Company contained in this paragraph (a) and the representations and
warranties of the Company and Principal Securityholder contained in Section 2
and Section 3 hereof shall remain operative and in full force and effect
regardless of any investigation made by or on behalf of any indemnified party
and shall survive the delivery of and payment for the shares.
<PAGE> 15
(b) Each Underwriter severally agrees to indemnify and hold
harmless the Company, each of its officers who signs the Registration Statement
on his own behalf or pursuant to a power of attorney, each of its directors,
each other Underwriter and each person (including each partner or officer
thereof) who controls the Company or any such other Underwriter within the
meaning of Section 15 of the Securities Act, from and against any and all
losses, claims, damages or liabilities, joint or several, to which such
indemnified parties or any of them may become subject under the Securities Act,
the Exchange Act, or the common law or otherwise and to reimburse each of them
for any legal or other expenses (including, except as otherwise hereinafter
provided, reasonable fees and disbursements of counsel) incurred by the
respective indemnified parties in connection with defending against any such
losses, claims, damages or liabilities or in connection with any investigation
or inquiry of, or other proceeding which may be brought against, the respective
indemnified parties, in each case arising out of or based upon (i) any untrue
statement or alleged untrue statement of a material fact contained in the
Registration Statement (including the Prospectus as part thereof and any Rule
462(b) registration statement) or any post-effective amendment thereto
(including any Rule 462(b) registration statement) or the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading or (ii) any untrue
statement or alleged untrue statement of a material fact contained in the
Prospectus (as amended or as supplemented if the Company shall have filed with
the Commission any amendment thereof or supplement thereto) or the omission or
alleged omission to state therein a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, if such statement or omission was made in reliance upon
and in conformity with information furnished as herein stated or otherwise
furnished in writing to the Company by or on behalf of such indemnifying
Underwriter for use in the Registration Statement or the Prospectus or any such
amendment thereof or supplement thereto. The indemnity agreement of each
Underwriter contained in this paragraph (b) shall remain operative and in full
force and effect regardless of any investigation made by or on behalf of any
indemnified party and shall survive the delivery of and payment for the shares.
(c) Each party indemnified under the provision of paragraphs
(a) and (b) of this Section 7 agrees that, upon the service of a summons or
other initial legal process upon it in any action or suit instituted against it
or upon its receipt of written notification of the commencement of any
investigation or inquiry of, or proceeding against, it in respect of which
indemnity may be sought on account of any indemnity agreement contained in such
paragraphs, it will promptly give written notice (the "Notice") of such service
or notification to the party or parties from whom indemnification may be sought
hereunder. No indemnification provided for in such paragraphs shall be available
to any party who shall fail so to give the Notice if the party to whom such
Notice was not given was unaware of the action, suit, investigation, inquiry or
proceeding to which the Notice would have related and was prejudiced by the
failure to give the Notice, but the omission so to notify such indemnifying
party or parties of any such service or notification shall not relieve such
indemnifying party or parties from any liability which it or they may have to
the indemnified party for contribution or otherwise than on account of such
indemnity agreement. Any indemnifying party shall be entitled at its own expense
to participate in the defense of any action, suit or proceeding against, or
investigation or inquiry of, an indemnified party. Any indemnifying party shall
be entitled, if it so elects within a reasonable time after receipt of the
Notice by giving written notice (the "Notice of Defense") to the indemnified
party, to assume (alone or in conjunction with any other indemnifying party or
parties) the entire defense of such action, suit, investigation, inquiry or
proceeding, in which event such defense shall be conducted, at the expense of
the indemnifying party or parties, by counsel chosen by such indemnifying party
or parties and reasonably satisfactory to the indemnified party
<PAGE> 16
or parties; provided, however, that (i) if the indemnified party or parties
reasonably determine that there may be a conflict between the positions of the
indemnifying party or parties and of the indemnified party or parties in
conducting the defense of such action, suit, investigation, inquiry or
proceeding or that there may be legal defenses available to such indemnified
party or parties different from or in addition to those available to the
indemnifying party or parties, then counsel for the indemnified party or parties
shall be entitled to conduct the defense to the extent reasonably determined by
such counsel to be necessary to protect the interests of the indemnified party
or parties and (ii) in any event, the indemnified party or parties shall be
entitled to have counsel chosen by such indemnified party or parties participate
in, but not conduct, the defense. If, within a reasonable time after receipt of
the Notice, an indemnifying party gives a Notice of Defense and the counsel
chosen by the indemnifying party or parties is reasonably satisfactory to the
indemnified party or parties, the indemnifying party or parties will not be
liable under paragraphs (a) through (c) of this Section 7 for any legal or other
expenses subsequently incurred by the indemnified party or parties in connection
with the defense of the action, suit, investigation, inquiry or proceeding,
except that (A) the indemnifying party or parties shall bear the legal and other
expenses incurred in connection with the conduct of the defense as referred to
in clause (i) of the proviso to the preceding sentence and (B) the indemnifying
party or parties shall bear such other expenses as it or they have authorized to
be incurred by the indemnified party or parties. If, within a reasonable time
after receipt of the Notice, no Notice of Defense has been given, the
indemnifying party or parties shall be responsible for any legal or other
expenses incurred by the indemnified party or parties in connection with the
defense of the action, suit, investigation, inquiry or proceeding.
(d) If the indemnification provided for in this Section 7 is
unavailable or insufficient to hold harmless an indemnified party under
paragraph (a) or (b) of this Section 7, then each indemnifying party, in lieu of
indemnifying such indemnified party, shall contribute to the amount paid or
payable by such indemnified party as a result of the losses, claims, damages or
liabilities referred to in paragraph (a) or (b) of this Section 7 (i) in such
proportion as is appropriate to reflect the relative benefits received by each
indemnifying party from the offering of the shares or (ii) if the allocation
provided by clause (i) above is not permitted by applicable law, in such
proportion as is appropriate to reflect not only the relative benefits referred
to in clause (i) above but also the relative fault of each indemnifying party in
connection with the statements or omissions that resulted in such losses,
claims, damages or liabilities, or actions in respect thereof, as well as any
other relevant equitable considerations. The relative benefits received by the
Company on the one hand and the Underwriters on the other shall be deemed to be
in the same respective proportions as the total net proceeds from the offering
of the shares received by the Company and the total underwriting discount
received by the Underwriters, as set forth in the table on the cover page of the
Prospectus, bear to the aggregate public offering price of the shares. Relative
fault shall be determined by reference to, among other things, whether the
untrue or alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by each
indemnifying party and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such untrue statement or
omission.
The parties agree that it would not be just and equitable if
contributions pursuant to this paragraph (d) were to be determined by pro rata
allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take into account
the equitable considerations referred to in the
<PAGE> 17
first sentence of this paragraph (d). The amount paid by an indemnified party as
a result of the losses, claims, damages or liabilities, or actions in respect
thereof, referred to in the first sentence of this paragraph (d) shall be deemed
to include any legal or other expenses reasonably incurred by such indemnified
party in connection with investigation, preparing to defend or defending against
any action or claim which is the subject of this paragraph (d). Notwithstanding
the provisions of this paragraph (d), no Underwriter shall be required to
contribute any amount in excess of the underwriting discount applicable to the
shares purchased by such Underwriter. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Underwriters' obligations in this paragraph
(d) to contribute are several in proportion to their respective underwriting
obligations and not joint.
Each party entitled to contribution agrees that upon the service of a
summons or other initial legal process upon it in any action instituted against
it in respect of which contribution may be sought, it will promptly give written
notice of such service to the party or parties from whom contribution may be
sought, but the omission so to notify such party or parties of any such service
shall not relieve the party from whom contribution may be sought from any
obligation it may have hereunder or otherwise (except as specifically provided
in paragraph (c) of this Section 7).
(e) The Company will not, without the prior written consent of each
Underwriter, settle or compromise or consent to the entry of any judgment in any
pending or threatened claim, action, suit or proceeding in respect of which
indemnification may be sought hereunder (whether or not such Underwriter or any
person who controls such Underwriter within the meaning of Section 15 of the
Securities Act or Section 20 of the Exchange Act is a party to such claim,
action, suit or proceeding) unless such settlement, compromise or consent
includes an unconditional release of such Underwriter and each such controlling
person from all liability arising out of such claim, action, suit or proceeding.
SECTION 8. REIMBURSEMENT OF CERTAIN EXPENSES. In addition to their
other obligations under Section 8 of this Agreement, the Company agrees to
reimburse on a monthly basis the Underwriters for all reasonable legal and other
expenses incurred in connection with investigating or defending any claim,
action, investigation, inquiry or other proceeding arising out of or based upon
any statement or omission, or any alleged statement or omission, described in
paragraph (a) of Section 7 of this Agreement, notwithstanding the absence of a
judicial determination as to the propriety and enforceability of the obligations
under this Section 8 and the possibility that such payments might later be held
to be improper; provided, however, that (i) to the extent any such payment is
ultimately held to be improper, the persons receiving such payments shall
promptly refund them and (ii) such persons shall provide to the Company, upon
request, reasonable assurances of their ability to effect any refund, when and
if due.
SECTION 9. TERMINATION. This Agreement may be terminated by you at
any time prior to the Closing Date by giving written notice to the Company in
accordance with Section 10, or if after the date of this Agreement trading in
the Common Stock shall have been suspended, or if there shall have occurred (i)
the engagement in hostilities or an escalation of major hostilities by the
United States or the declaration of war or a national emergency by the United
States on or after the date hereof, (ii) any outbreak of hostilities or other
national or international calamity or crisis or change in economic or political
conditions if the effect of such outbreak, calamity, crisis or change in
economic or political conditions in the financial markets of the United States
or the Company's industry sector would, in the Underwriters' reasonable
judgment, make the offering or delivery of the shares impracticable, (iii)
suspension of trading
<PAGE> 18
in securities generally or a material adverse decline in value of securities
generally on the New York Stock Exchange, the American Stock Exchange, or the
Nasdaq National Market, or limitations on prices (other than limitations on
hours or numbers of days of trading) for securities on either such exchange or
system, (iv) the enactment, publication, decree or other promulgation of any
federal or state statute, regulation, rule or order of, or commencement of any
proceeding or investigation by, any court, legislative body, agency or other
governmental authority which in the Underwriters' reasonable opinion materially
and adversely affects or will materially or adversely affect the business or
operations of the Company, (v) declaration of a banking moratorium by either
federal or New York State authorities or (vi) the taking of any action by any
federal, state or local government or agency in respect of its monetary or
fiscal affairs which in the Underwriters' reasonable opinion has a material
adverse effect on the securities markets in the United States. If this Agreement
shall be terminated pursuant to this Section 9, there shall be no liability of
the Company or the Principal Securityholder to the Underwriters and no liability
of the Underwriters to the Company or the Principal Securityholder; provided,
however, that in the event of any such termination the Company agrees to
indemnify and hold harmless the Underwriters from all costs or expenses incident
to the performance of the obligations of the Company under this Agreement,
including all costs and expenses referred to in paragraphs (i) and (j) of
Section 6 hereof.
SECTION 10. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The obligations
of the several Underwriters to purchase and pay for the shares shall be subject
to the performance by the Company of all of its obligations to be performed
hereunder at or prior to the Closing Date or any later date on which Optional
Shares are to be purchased, as the case may be, and to the following further
conditions:
(a) The Registration Statement shall have become effective; and no
stop order suspending the effectiveness thereof shall have been issued and no
proceedings therefor shall be pending or threatened by the Commission.
(b) The legality and sufficiency of the sale of the shares hereunder
and the validity and form of the certificates representing the shares, all
corporate proceedings and other legal matters incident to the foregoing, and the
form of the Registration Statement and of the Prospectus (except as to the
financial statements contained therein), shall have been approved at or prior to
the Closing Date by Wilson, Sonsini, Goodrich & Rosati, Professional
Corporation, counsel for the Underwriters.
(c) You shall have received from Brobeck, Phleger and Harrison,
counsel for the Company, from Knobbe, Martens, Olson & Bear, patent counsel to
the Company, and from Hyman, Phelps and McNamara, regulatory counsel for the
Company, opinions addressed to the Underwriters and dated the Closing Date,
covering the matters set forth in Annexes A, B and C hereto, respectively, and
if Optional Shares are purchased at any date after the Closing Date, additional
opinions from each such counsel, addressed to the Underwriters and dated such
later date, confirming that the statements expressed as of the Closing Date in
such opinions remain valid as of such later date.
(d) You shall be satisfied that (i) as of the Effective Date, the
statements made in the Registration Statement and the Prospectus were true and
correct, and neither the Registration Statement nor the Prospectus omitted to
state any material fact required to be stated therein or necessary in order to
make the statements therein, respectively, not misleading; (ii) since the
Effective Date, no event has occurred which should have been set forth in a
supplement or amendment to the Prospectus which has not been set
<PAGE> 19
forth in such a supplement or amendment; (iii) since the respective dates as of
which information is given in the Registration Statement in the form in which it
originally became effective and the Prospectus contained therein, there has not
been any material adverse change or any development involving a prospective
material adverse change in or affecting the business, properties, financial
condition or results of operations of the Company, whether or not arising from
transactions in the ordinary course of business, and, since such dates, except
in the ordinary course of business, the Company has not entered into any
material transaction not referred to in the Registration Statement in the form
in which it originally became effective and the Prospectus contained therein;
(iv) the Commission has not issued any order preventing or suspending the use of
the Prospectus or any Preliminary Prospectus filed as a part of the Registration
Statement or any amendment thereto; no stop order suspending the effectiveness
of the Registration Statement has been issued; and to the best knowledge of the
respective signers, no proceedings for that purpose have been instituted or are
pending or contemplated under the Securities Act; (v) the Company has not any
material contingent obligations which are not disclosed in the Registration
Statement and the Prospectus; (vi) there are not any pending or known threatened
legal proceedings to which the Company is a party or of which property of the
Company is the subject which are material and which are not disclosed in the
Registration Statement and the Prospectus; (vii) there are not any franchises,
contracts, leases or other documents which are required to be filed as exhibits
to the Registration Statement which have not been filed as required; and (viii)
the representations and warranties of the Company and the Principal
Securityholder herein are true and correct in all material respects as of the
Closing Date or any later date on which Optional Shares are to be purchased, as
the case may be.
(e) You shall have received on the Closing Date and on any later date
on which Optional Shares are purchased a certificate, dated the Closing Date or
such later date, as the case may be, and signed by the President and the Chief
Financial Officer of the Company stating that the respective signers of said
certificate have carefully examined the Registration Statement in the form in
which it originally became effective and the Prospectus contained therein and
any supplements or amendments thereto, and that the statements included in
clauses (i) through (viii) of paragraph (d) of this Section 10 are true and
correct, together with a certificate, dated the Closing Date or such later date,
as the case may be, and signed by the President and the Chief Financial Officer
of the Principal Securityholder stating that the respective signers of said
certificate have carefully examined the Registration Statement in the form in
which it originally became effective and the Prospectus contained therein and
any supplements or amendments thereto, and that the statements included in
clauses (i) through (viii) of paragraph (d) of this Section 10 are true and
correct.
(f) You shall have received from Ernst & Young, a letter or letters,
addressed to the Underwriters and dated the Closing Date and any later date on
which Optional Shares are purchased, confirming that they are independent public
accountants with respect to the Company within the meaning of the Securities Act
and the applicable published rules and regulations thereunder and based upon the
procedures described in their letter delivered to you concurrently with the
execution of this Agreement (the "Original Letter"), but carried out to a date
not more than three business days prior to the Closing Date or such later date
on which Optional Shares are purchased (i) confirming, to the extent true, that
the statements and conclusions set forth in the Original Letter are accurate as
of the Closing Date or such later date, as the case may be, and (ii) setting
forth any revisions and additions to the statements and conclusions set forth in
the Original Letter which are necessary to reflect any changes in the facts
described in the Original Letter since the date of the Original Letter or to
reflect the availability of more recent financial
<PAGE> 20
statements, data or information. The letters shall not disclose any change, or
any development involving a prospective change, in or affecting the business or
properties of the Company or any of its subsidiaries which, in your sole
judgment, makes it impractical or inadvisable to proceed with the public
offering of the shares or the purchase of the Optional Shares as contemplated by
the Prospectus.
(g) You shall have received from Ernst & Young a letter stating that
their review of the Company's system of internal accounting controls, to the
extent they deemed necessary in establishing the scope of their examination of
the Company's financial statements as at March 31, 1996, did not disclose any
weakness in internal controls that they considered to be material weaknesses.
(h) You shall have been furnished evidence in usual written or
telegraphic form from the appropriate authorities of the several jurisdictions,
or other evidence satisfactory to you, of the qualification referred to in
paragraph (f) of Section 6 hereof.
(i) Prior to the Closing Date, the shares to be issued and sold by the
Company shall have been duly authorized for listing by the Nasdaq National
Market upon official notice of issuance.
(j) On or prior to the Closing Date, you shall have received from all
directors, officers, and beneficial holders of the outstanding Common Stock
agreements, in form reasonably satisfactory to Volpe, Welty & Company, stating
that without the prior written consent of Volpe, Welty & Company, such person or
entity will not, for a period of 180 days following the date the Registration
Statement became effective (i) offer, sell, contract to sell, make any short
sale (including without limitation short against the box), pledge, or otherwise
dispose of, directly or indirectly, any shares of Common Stock or any options to
acquire shares of Common Stock or securities convertible into or exchangeable or
exercisable for or any other rights to purchase or acquire Common Stock
(including without limitation, Common Stock of the Company which may be deemed
to be beneficially owned in accordance with the rules and regulations of the
Commission) other than the exercise or conversion of outstanding options,
warrants or convertible securities or (ii) enter into any swap or other
agreement that transfers, in whole or in part, any of the economic consequences
or ownership of Common Stock, whether any such transaction described in clause
(i) or (ii) above is to be settled by delivery of Common Stock or such other
securities, in cash or otherwise; provided, however, that bona fide gift
transactions and transfers which will not result in any change in beneficial
ownership may be permitted if the transferee enters into a lock-up agreement in
substantially the same form covering the remainder of the lock-up period.
All the agreements, opinions, certificates and letters mentioned above
or elsewhere in this Agreement shall be deemed to be in compliance with the
provisions hereof only if Wilson, Sonsini, Goodrich & Rosati, Professional
Corporation, counsel for the Underwriters, shall be satisfied that they comply
in form and scope.
In case any of the conditions specified in this Section 10 shall not be
fulfilled, this Agreement may be terminated by you by giving notice to the
Company. Any such termination shall be without liability of the Company to the
Underwriters and without liability of the Underwriters to the Company; provided,
however, that (i) in the event of such termination, the Company agrees to
indemnify and hold harmless the Underwriters from all costs or expenses incident
to the performance of the obligations of the Company under this Agreement,
including all costs and expenses referred to in paragraphs (i) and (j) of
Section 6
<PAGE> 21
hereof, and (ii) if this Agreement is terminated by you because of any refusal,
inability or failure on the part of the Company to perform any agreement herein,
to fulfill any of the conditions herein, or to comply with any provision hereof
other than by reason of a default by any of the Underwriters, the Company will
reimburse the Underwriters severally upon demand for all out-of-pocket expenses
(including reasonable fees and disbursements of counsel) that shall have been
incurred by them in connection with the transactions contemplated hereby.
SECTION 11. CONDITIONS OF THE OBLIGATION OF THE COMPANY. The
obligation of the Company to deliver the shares shall be subject to the
conditions that (a) the Registration Statement shall have become effective and
(b) no stop order suspending the effectiveness thereof shall be in effect and no
proceedings therefor shall be pending or threatened by the Commission.
In case either of the conditions specified in this Section 11 shall not
be fulfilled, this Agreement may be terminated by the Company by giving notice
to you. Any such termination shall be without liability of the Company to the
Underwriters and without liability of the Underwriters to the Company; provided,
however, that in the event of any such termination the Company agrees to
indemnify and hold harmless the Underwriters from all costs or expenses incident
to the performance of the obligations of the Company under this Agreement,
including all costs and expenses referred to in paragraphs (i) and (j) of
Section 6 hereof.
SECTION 12. PERSONS ENTITLED TO BENEFIT OF AGREEMENT. This Agreement
shall inure to the benefit of the Company and the several Underwriters and, with
respect to the provisions of Section 7 hereof, the several parties (in addition
to the Company and the several Underwriters) indemnified under the provisions of
said Section 7, and their respective personal representatives, successors and
assigns. Nothing in this Agreement is intended or shall be construed to give to
any other person, firm or corporation any legal or equitable remedy or claim
under or in respect of this Agreement or any provision herein contained. The
term "successors and assigns" as herein used shall not include any purchaser, as
such purchaser, of any of the shares from any of the several Underwriters.
SECTION 13. NOTICES. Except as otherwise provided herein, all
communications hereunder shall be in writing or by telegraph and, if to the
Underwriters, shall be mailed, telegraphed or delivered to Volpe, Welty &
Company, One Maritime Plaza, 11th Floor, San Francisco, California 94111,
Attention: Gil Mogavero; and if to the Company, shall be mailed, telegraphed or
delivered to it at its office, 13900 Alton Parkway, Suite 122, Irvine,
California 92718, Attention: Chief Executive Officer; and if to the Principal
Securityholder, shall be mailed, telegraphed or delivered to the Principal
Securityholder at its office, 6616 Owens Drive, Pleasanton, California 94588,
Attention: Chief Executive Officer. All notices given by telegraph shall be
promptly confirmed by letter.
SECTION 14. MISCELLANEOUS. The reimbursement, indemnification and
contribution agreements contained in this Agreement and the representations,
warranties and covenants in this Agreement shall remain in full force and effect
regardless of (a) any termination of this Agreement, (b) any investigation made
by or on behalf of any Underwriter or controlling person thereof, or by or on
behalf of the Company or their respective directors or officers, and (c)
delivery and payment for the shares under this Agreement; provided, however,
that if this Agreement is terminated prior to the Closing Date, the provisions
of paragraphs (l) and (m) of Section 6 hereof shall be of no further force or
effect.
<PAGE> 22
SECTION 15. PARTIAL UNENFORCEABILITY. The invalidity or
unenforceability of any Section, paragraph or provision of this Agreement shall
not affect the validity or enforceability of any other Section, paragraph or
provision hereof. If any Section, paragraph or provision of this Agreement is
for any reason deter mined to be invalid or unenforceable, there shall be deemed
to be made such minor changes (and only such minor changes) as are necessary to
make it valid and enforceable.
SECTION 16. APPLICABLE LAW. This Agreement shall be governed by and
construed in accordance with the internal laws (and not the laws pertaining to
conflicts of laws) of the State of California.
SECTION 17. GENERAL. This Agreement constitutes the entire agreement
of the parties to this Agreement and supersedes all prior written or oral and
all contemporaneous oral agreements, understandings and negotiations with
respect to the subject matter hereof. This Agreement may be executed in several
counterparts, each one of which shall be an original, and all of which shall
constitute one and the same document.
In this Agreement, the masculine, feminine and neuter genders and the
singular and the plural include one another. The section headings in this
Agreement are for the convenience of the parties only and will not affect the
construction or interpretation of this Agreement. This Agreement may be amended
or modified, and the observance of any term of this Agreement may be waived,
only by a writing signed by the Company and you.
<PAGE> 23
If the foregoing is in accordance with your understanding of our
agreement, kindly sign and return to us the enclosed copies hereof, whereupon it
will become a binding agreement among the Company and the several Underwriters,
including you, all in accordance with its terms.
Very truly yours,
CARDIOVASCULAR DYNAMICS, INC.
By:______________________________________
Title:___________________________________
ENDOSONICS CORPORATION
By:______________________________________
Title:___________________________________
The foregoing Underwriting
Agreement is hereby confirmed
and accepted by us in San
Francisco, California as of
the date first above written.
VOLPE, WELTY & COMPANY
Acting for ourselves and as
Representative of the several
Underwriters named in the
attached Schedule A
By:_______________________________
Partner
<PAGE> 24
SCHEDULE I
UNDERWRITERS
<TABLE>
<CAPTION>
NUMBER OF
SHARES
TO BE
UNDERWRITERS PURCHASED
- ------------------------------------------------------------------------------
<S> <C>
Volpe, Welty & Company ...................................
Wessels, Arnold & Henderson ..............................
Vector Securities International, Inc. ....................
Total .....................................
=========
</TABLE>
<PAGE> 25
ANNEX A
MATTERS TO BE COVERED IN THE OPINION OF BROBECK, PHLEGER AND HARRISON,
COUNSEL FOR THE COMPANY
(i) the Company has been duly incorporated and is validly existing
as a corporation in good standing under the laws of the jurisdiction of its
incorporation, is duly qualified as a foreign corporation and in good standing
in each state of the United States of America in which the nature of its
business or its ownership or leasing of property requires such qualification
(except where the failure to be so qualified would not have a material adverse
effect on the business, properties, financial condition or results of operations
of the Company), and has full corporate power and authority to own or lease its
properties and conduct its business as described in the Registration Statement;
(ii) the authorized capital stock of the Company consists of
30,000,000 shares of Common Stock, $0.001 par value, of which there are
______________outstanding shares, and 5,000,000 shares of Preferred Stock,
$0.001 par value, of which there are outstanding _____________ shares; all of
the outstanding shares of such capital stock (including the Firm Shares and the
Optional Shares issued, if any) have been duly authorized and validly issued and
are fully paid and nonassessable; any Optional Shares purchased after the
Closing Date have been duly authorized and, when issued and delivered to, and
paid for by, the Underwriters as provided in the Underwriting Agreement, will be
validly issued and fully paid and nonassessable; and no preemptive rights of, or
rights of refusal in favor of, stockholders exist with respect to the Shares, or
the issue and sale thereof, pursuant to the Certificate of Incorporation or
Bylaws of the Company or any other instrument and, to the knowledge of such
counsel, there are no contractual preemptive rights that have not been waived,
rights of first refusal or rights of co-sale which exist with respect to sale of
the Shares by the Company;
(iii) the Registration Statement has become effective under the
Securities Act and, to the best of such counsel's knowledge, no stop order
suspending the effectiveness of the Registration Statement or suspending or
preventing the use of the Prospectus is in effect and no proceedings for that
purpose have been instituted or are pending or contemplated by the Commission;
(iv) the Registration Statement and the Prospectus (except as to the
financial statements and schedules and other financial data contained therein,
as to which such counsel need express no opinion) comply as to form in all
material respects with the requirements of the Securities Act and with the rules
and regulations of the Commission thereunder;
(v) such counsel have no reason to believe that the Registration
Statement (except as to the financial statements and schedules and other
financial data contained therein, as to which such counsel need not express any
opinion or belief) at the Effective Date contained any untrue statement of a
material fact or omitted to state a material fact required to be stated therein
or necessary to make the statements therein not misleading, or that the
Prospectus (except as to the financial statements and schedules and other
financial data contained therein, as to which such counsel need not express any
opinion or belief) as of its date or at the Closing Date (or any later date on
which Optional Shares are purchased), contained or contains any
<PAGE> 26
untrue statement of a material fact or omitted or omits to state a material fact
necessary in order to make the statements therein, in light of the circumstances
under which they were made, not misleading;
(vi) the information required to be set forth in the Registration
Statement in answer to Items 9, 10 (insofar as it relates to such counsel) and
11(c) of Form S-1 is to the best of such counsel's knowledge accurately and
adequately set forth therein in all material respects or no response is required
with respect to such Items, and, the description of the Company's employee stock
purchase plan and its stock option plans and the options granted and which may
be granted thereunder and the options granted otherwise than under such plans
set forth or incorporated by reference in the Prospectus accurately and fairly
presents the information required to be shown with respect to said plans and
options to the extent required by the Securities Act and the rules and
regulations of the Commission thereunder;
(vii) such counsel do not know of any franchises, contracts, leases,
documents or legal proceedings, pending or threatened, which in the opinion of
such counsel are of a character required to be described in the Registration
Statement or the Prospectus or to be filed as exhibits to the Registration
Statement, which are not described and filed as required;
(viii) the Underwriting Agreement has been duly authorized, executed
and delivered by the Company;
(ix) the Company has full corporate power and authority to enter
into the Underwriting Agreement and to sell and deliver the Shares to be sold by
it to the several Underwriters; the Underwriting Agreement is a valid and
binding agreement of the Company enforceable in accordance with its terms,
except as enforceability may be limited by general equitable principles,
bankruptcy, insolvency, reorganization, moratorium or other laws affecting
creditor's rights generally and except as to those provisions relating to
indemnity or contribution for liabilities arising under federal and state
securities laws (as to which no opinion need be expressed).
(x) the issue and sale by the Company of the Shares sold by the
Company as contemplated by the Underwriting Agreement will not conflict with, or
result in a breach of, or constitute a default under the Certificate of
Incorporation or Bylaws of the Company or any agreement or instrument known to
such counsel to which the Company is a party or by which any of its properties
may be bound or any applicable law or regulation, or so far as is known to such
counsel, any order, writ, injunction or decree, of any jurisdiction, court or
governmental instrumentality;
(xi) all holders of securities of the Company having rights to the
registration of shares of Common Stock, or other securities, because of the
filing of the Registration Statement by the Company have waived such rights or
such rights have expired by reason of lapse of time following notification of
the Company's intent to file the Registration Statement;
(xii) good and marketable title to the Shares under the Underwriting
Agreement, free and clear of all liens, encumbrances, equities, security
interests and claims, has been transferred to the Underwriters who have
severally purchased such Shares under the Underwriting Agreement, assuming for
the purpose of this opinion that the Underwriters purchased the same in good
faith without notice of any adverse claims;
<PAGE> 27
(xiii) no consent, approval, authorization or order of any court or
governmental agency or body is required for the consummation of the transactions
contemplated in the Underwriting Agreement, except such as have been obtained
under the Securities Act and such as may be required under state securities or
blue sky laws in connection with the purchase and distribution of the Shares by
the Underwriters and the clearance of the offering with the NASD; and
(xiv) the Shares issued and sold by the Company will have been duly
authorized for listing by the Nasdaq National Market upon official notice of
issuance.
------------------------------------
Counsel rendering the foregoing opinion may rely as to questions of law
not involving the laws of the United States or of the State of Delaware, upon
opinions of local counsel satisfactory in form and scope to counsel for the
Underwriters. Copies of any opinions so relied upon shall be delivered to the
Representatives and to counsel for the Underwriters and the foregoing opinion
shall also state that counsel knows of no reason the Underwriters are not
entitled to rely upon the opinions of such local counsel.
<PAGE> 28
ANNEX B
PROPOSED FORM OF OPINION OF GERARD KNOBBE, MARTENS, OLSON & BEAR,
PATENT COUNSEL FOR THE COMPANY
_____________, 1996
Volpe, Welty & Company
Wessels, Arnold & Henderson
Vector Securities International, Inc.
As Representatives of the several Underwriters
c/o Volpe, Welty & Company
One Maritime Plaza, 11th Floor
San Francisco, California 94111
Dear Sirs and Madams:
This opinion is being delivered pursuant to Section 10(c) of the
Underwriting Agreement between you and CardioVascular Dynamics, Inc. (the
"Company") dated __________, 1996 (the "Underwriting Agreement"), relating to a
public offering of the Company's common stock pursuant to a registration
statement on Form S-1 (Registration No. 333-4560) (the "Registration
Statement"). We are intellectual property counsel for the Company, and are
familiar with the Company's technology as described in the Prospectus included
in the Registration Statement and with the manner in which the Company uses that
technology.
We have reviewed the patents listed on Schedule A attached hereto
(the "CVD Patents") and the patent applications listed on Exhibit B attached
hereto (the "CVD Applications"), relating to the technology described in the
Prospectus. Furthermore, we have reviewed copies of assignments where each
individual named as an inventor in each of the CVD Patents and Applications
described in Exhibits A and B hereto has assigned to CVD his or her entire
right, title and interest in the invention described in the subject patent or
patent application.
We have relied on such certificates, documents and records with
respect to the accuracy of factual matters as we have deemed appropriate for the
opinions expressed herein. We have assumed without investigation the
authenticity of all documents submitted to us as originals, the conformity to
original documents of documents submitted to us as certified or photostatic
copies of original documents, the genuineness of all signatures, the legal
capacity of natural persons and the accuracy of the statements contained in such
certificates.
<PAGE> 29
The validity, binding effect and enforceability of instruments of
assignment of patent applications and issued patents may be subject to or
affected by applicable bankruptcy, insolvency, reorganization, moratorium,
fraudulent conveyance, or similar laws affecting the enforcement of the rights
of creditors generally.
The availability of the remedy of specific performance or injunctive
relief, or any other equitable remedy, is subject to the discretion of a court
or tribunal before which any proceeding therefor may be brought, and we are not
commenting on the question of whether such remedies would be available in the
opinions expressed herein.
We are familiar with the technology used by the Company in its business
and the manner of its use thereof and have read the Registration Statement and
the Prospectus, including particularly the portions of the Registration
Statement and the Prospectus referring to patents, trade secrets, trademarks,
service marks or other proprietary information or materials.
Based on the foregoing, and subject to the additional qualifications
set forth below, it is our opinion that:
1. The Company is listed in the records of the Patent and Trademark
Office as the holder of record of each of the CVD Patents and CVD Applications.
To the best of our knowledge, we know of no claims of third parties to any
ownership interest or lien with respect to any of the CVD Patents or
Applications.
2. To the best of our knowledge, the Company is listed in the records
of the appropriate foreign office as the sole holder of record of each of the
foreign CVD Applications listed on Exhibit B attached hereto. We are not aware
of any claim of any third party to any of the foreign applications.
3. We have examined the following portions of the Prospectus included
in the Registration Statement (collectively, the "Intellectual Property
Portion"):
(i) the section entitled "Risk Factors -- Reliance on Patents
and Proprietary Technology; Risk of Patent Infringement";
and
(ii) the sections entitled "Business -- Patents and Proprietary
Information," "Business - - Products" and "Business --
Technology".
Insofar as such statements constitute a summary of the CVD Patents and
Applications, they are in all material respects accurate summaries and fairly
summarize in all material respects the legal matters, documents and proceedings
relating to the CVD Patents and Applications described therein. The Company
currently owns _____ issued U.S. patents and _____ pending U.S. patent
applications.
4. We are not aware of any facts that would lead us to conclude that
any of the CVD Patents are invalid or that any patent issued in respect of a CVD
Application would be invalid.
<PAGE> 30
5. Except as disclosed in the Intellectual Property Portion, we are
not aware that any valid patent owned by any third party is infringed by the
activities of the Company described in the Prospectus or by the manufacture, use
or sale of any product, device, instrument, drug or other material made and used
according to the CVD Patents or Applications.
6. We are not aware of any material defects of form in the
preparation or filing of the CVD Applications on behalf of the Company. To the
best of our knowledge, the CVD Applications are being diligently pursued by the
Company.
7. We are not aware of any pending or threatened action, suit,
proceeding or claim by others that the Company is infringing or otherwise
violating any patents or trade secrets.
8. We are not aware of any pending or threatened action, suit,
proceeding or claim by others challenging the validity or scope of the CVD
Patents or Applications.
9. We are not aware of any infringement on the part of any third
party of the CVD Patents, trade secrets, know-how or other proprietary rights of
the Company.
10. We have no reason to believe that the Registration Statement or
the Prospectus (A) contains any untrue statement of a material fact with respect
to patents, trade secrets, trademarks, service marks or other proprietary
information or materials owned or used by the Company, or the manner of its use
thereof, or any allegation on the part of any person that the Company is
infringing any patent rights, trade secrets, trademarks, service marks or other
proprietary information or materials of any such person or (B) omits to state
any material fact relating to patents, trade secrets, trademarks, service marks
or other proprietary information or materials owned or used by the Company, or
the manner of its use thereof, or any allegation of which such counsel have
knowledge, that is required to be stated in the Registration Statement or the
Prospectus or is necessary to make the statements therein not misleading.
We express no opinion as to matters governed by laws of any
jurisdiction other than the laws of the State of California and federal laws of
the United States.
Terms used but not defined herein shall have the meaning set forth in
the Underwriting Agreement.
This opinion is solely for your benefit and may not be relied on by,
nor may copies be delivered to, any person other than the addressee without our
prior written consent.
<PAGE> 31
ANNEX C
PROPOSED FORM OF OPINION OF HYMAN, PHELPS AND MCNAMARA,
FDA REGULATORY COUNSEL FOR THE COMPANY
______________, 1996
Volpe, Welty & Company
Wessels, Arnold & Henderson
Vector Securities International, Inc.
As Representatives of the several Underwriters
c/o Volpe, Welty & Company
One Maritime Plaza, 11th Floor
San Francisco, California 94111
Dear Sirs and Madams:
This opinion is being delivered pursuant to Section 10(c) of the
Underwriting Agreement between you and CardioVascular Dynamics, Inc. (the
"Company") dated __________, 1996 (the "Underwriting Agreement"), relating to a
public offering of the Company's common stock pursuant to a registration
statement on Form S-1 (Registration No. 333-4560) (the "Registration
Statement"). This firm has acted as special Federal Food and Drug Administration
(FDA) Regulatory Counsel to the Company in connection with the public offering
by the Company of up to 3,400,000 shares of its Common Stock.
This opinion is to the best of our knowledge and is based solely
on matters of law as they pertain to the Food, Drug and Cosmetic Act, as
implemented by FDA, and the Medicare and Medicaid Acts regarding reimbursement
as it applies to medical devices, as implemented by the Health Care Financing
Administration (HCFA), and we express no opinion as to any other laws, statutes,
regulations, or ordinances. Based on, subject to, and limited by the foregoing,
we are of the opinion that:
(i) The statements under the captions "Risk Factors--Government
Regulation," "Risk Factors-- Limitations on Third Party Reimbursement,"
"Business--Third Party Reimbursement," "Business--Government Regulation,"
"Business--Products" and "Business--New Product Development" (collectively, the
"Regulatory Portion") in the Registration Statement and the Prospectus which
constitutes a part thereof (the "Prospectus") and any amendment or supplement
thereto, to the extent that they reflect matters of law, summaries of law or
regulations are correct in all material respects, subject to the qualifications
set forth therein.
(ii) Subject to the conditions and limitations expressed in this
opinion letter and in the Prospectus, nothing has come to the attention of such
counsel that would lead such counsel to believe that the Regulatory Portion of
the Registration Statement, at the time it became effective, contained any
untrue statement of a material fact or omitted to state any material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading or that,
on the closing date of the public offering, the information contained in the
Regulatory Portion of the Prospectus or any amendment or supplement to the
Prospectus contained any untrue statement of a material
C-1
<PAGE> 32
fact or omitted to state a material fact necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading.
Terms used but not defined herein shall have the meaning set forth
in the Underwriting Agreement.
We assume no obligations to advise you of any changes in the
foregoing subsequent to the delivery of this opinion. This opinion has been
prepared solely for your use in connection with the subject transaction that is
the one represented by the Registration Statement and the Prospectus. This
opinion may not be used for any other purpose, quoted or otherwise referred to
by any person without the written consent of this law firm.
C-2
<PAGE> 1
EXHIBIT 4.1
COMMON STOCK [CVD LOGO] COMMON STOCK
[NUMBER SEAL] CARDIOVASCULAR DYNAMICS, INC. [SHARES SEAL]
INCORPORATED UNDER THE LAWS SEE REVERSE FOR CERTAIN DEFINITIONS
OF THE STATE OF DELAWARE AND A STATEMENT AS TO THE RIGHTS,
PREFERENCES, PRIVILEGES AND RESTRIC-
TIONS ON SHARES
CUSIP 14160K 10 2
THIS CERTIFIES THAT
IS THE RECORD HOLDER OF
FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK, $.001 PAR VALUE PER
SHARE, OF
CARDIOVASCULAR DYNAMICS, INC.
transferable on the books of the Corporation by the holder hereof in person or
by duly authorized attorney upon surrender of this Certificate properly
endorsed. This Certificate is not valid until countersigned by the Transfer
Agent and registered by the Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signatures
of its duly authorized officers.
Dated:
/s/ Dana P. Nickell [SEAL] /s/ Michael R. Henson
SECRETARY CHAIRMAN AND
CHIEF EXECUTIVE OFFICER
COUNTERSIGNED AND REGISTERED:
CHASEMELLON SHAREHOLDER SERVICES, L.L.C.
TRANSFER AGENT AND REGISTRAR
BY
AUTHORIZED SIGNATURE
<PAGE> 2
A statement of the powers, designations, preferences and relative,
participating, optional or other special rights of each class of stock or
series thereof and the qualifications, limitations or restrictions of such
preferences and/or rights as established, from time to time, by the Certificate
of Incorporation of the Corporation and by any certificate of determination,
the number of shares constituting each class and series, and the designations
thereof, may be obtained by the holder hereof upon request and without charge
from the Secretary of the Corporation at the principal office of the
Corporation.
The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM -- as tenants in common
TEN ENT -- as tenants by the entireties
JT TEN -- as joint tenants with right of
survivorship and not as tenants
in common
COM PROP -- as community property
UNIF GIFT MIN ACT -- ...............Custodian...............
(Cust) (Minor)
under Uniform Gifts to Minors
Act....................................
(State)
UNIF TRF MIN ACT -- .........Custodian (until age.........)
(Cust)
................under Uniform Transfers
(Minor)
to Minors Act..........................
(State)
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, _________________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
______________________________________
_______________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
_______________________________________________________________________________
_______________________________________________________________________________
________________________________________________________________________ Shares
of the common stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
______________________________________________________________________ Attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated________________________
X________________________________________________
X________________________________________________
NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST
CORRESPOND WITH THE NAME(S) UPON THE FACE OF THE
CERTIFICATE IN EVERY PARTICULAR, WITHOUT
ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER.
Signature(s) Guaranteed
By____________________________________
THE SIGNATURE(S) SHOULD BE GUARANTEED
BY AN ELIGIBLE GUARANTOR INSTITUTION
(BANKS, STOCKBROKERS, SAVINGS AND LOAN
ASSOCIATIONS AND CREDIT UNIONS WITH
MEMBERSHIP IN AN APPROVED SIGNATURE
GUARANTEE MEDALLION PROGRAM), PURSUANT
TO S.E.C. RULE 17Ad-15.
<PAGE> 1
EXHIBIT 5.1
June 6, 1996
CardioVascular Dynamics, Inc.
13900 Alton Parkway
Suite 122
Irvine, CA 92718
Re: Registration Statement on Form S-1
Ladies and Gentlemen:
We have examined the Registration Statement on Form S-1
originally filed by CardioVascular Dynamics, Inc. (the "Company") with the
Securities and Exchange Commission (the "Commission") on May 3, 1996, as
thereafter amended or supplemented (the "Registration Statement"), in connection
with the registration under the Securities Act of 1933, as amended, of 3,910,000
shares of the Company's Common Stock (the "Shares"). The Shares include an
over-allotment option to the Underwriters to purchase up to 510,000 additional
shares of the Company's Common Stock and are to be sold to the Underwriters as
described in the Registration Statement for resale to the public. As your
counsel in connection with this transaction, we have examined the proceedings
taken and are familiar with the proceedings proposed to be taken by you in
connection with the sale and issuance of the Shares.
It is our opinion that, upon conclusion of the proceedings
being taken or contemplated by us, as your counsel, to be taken prior to the
issuance of the Shares, the Shares, when issued and sold in the manner described
in the Registration Statement, will be validly issued, fully paid and
nonassessable.
We consent to the use of this Opinion as an exhibit to said
Registration Statement, and further consent to the use of our name wherever
appearing in said Registration Statement, including the prospectus constituting
a part thereof, and in any amendment thereto.
Very truly yours,
/s/ Brobeck, Phleger & Harrison LLP
-----------------------------------
Brobeck, Phleger & Harrison LLP
<PAGE> 1
EXHIBIT 10.13
STOCKHOLDER AGREEMENT
This Stockholder Agreement ("Agreement") dated as of June
___, 1996 is made by and between CardioVascular Dynamics, Inc., a Delaware
corporation ("CVD") and Endosonics Corporation, a Delaware corporation
("Endosonics").
WHEREAS, CVD is contemplating an underwritten public offering
of its Common Stock (the "IPO");
WHEREAS, Endosonics will own approximately ___% of the
outstanding Common Stock of CVD after the IPO;
WHEREAS, the IPO will benefit Endosonics and CVD, and the
prospective underwriters of the IPO have recommended that the likelihood of a
successful IPO will be enhanced by Endosonics and CVD entering into an agreement
defining certain aspects of Endosonics's relationship and rights with respect to
CVD;
NOW, THEREFORE, in consideration of the foregoing and for
other good and valuable consideration, the parties agree as follows:
1. Affiliates. For purposes of this Agreement, the term "CVD"
includes any subsidiary of CVD. For purposes of this Agreement, the term
"Endosonics" includes any Affiliate of Endosonics (other than CVD). The term
"Affiliate" means any person or entity that directly or indirectly through one
or more intermediaries, controls or is controlled by, or is under common control
with, Endosonics.
2. Agreements Between Endosonics and CVD. During the period
commencing upon the date that a registration statement relating to the IPO is
declared effective by the Securities and Exchange Commission through the date of
the termination of this Agreement ("Effective Period") the parties agree that
Endosonics and CVD shall not enter into any transaction, contract, arrangement
or agreement with each other unless such transaction, contract, arrangement or
agreement has been approved by the Committee, as hereinafter defined. The
Committee shall be a special committee of the Board of Directors of CVD and
shall consist of not less than two directors of CVD, each of whom is not an
officer, director, employee or Affiliate of Endosonics. The members of the
Committee shall initially be Mitchell Dann and Gerard Von Hoffman.
3. Cumulative Voting. During the Effective Period Endosonics
shall not approve, and shall vote against, any amendment to Article _______ of
CVD's Certificate of Incorporation (or any other existing or future provisions
involving cumulative voting) which would eliminate cumulative voting for
election of directors.
<PAGE> 2
4. Restrictions on Affiliates. Endosonics shall not transfer
any securities of CVD to an Affiliate, unless prior to the transfer the
transferee (i) agrees with CVD to be bound by the terms of this Agreement, and
(ii) sets forth such agreement in a writing reasonably satisfactory in form and
substance to CVD.
5. Term. This Agreement shall terminate upon the earlier of
June ___, 2003 or the date on which Endosonics beneficially owns less than 25%
of the outstanding Common Stock of CVD. Such beneficial ownership shall be
determined in accordance with the Securities Exchange Act of 1934, as amended,
and the rules promulgated thereunder.
6. Successors. Except as specifically provided herein, the
terms and conditions of this Agreement shall inure to the benefit of and shall
be binding upon the respective successors and assigns of the parties.
7. Governing Law. This Agreement shall be governed by and
construed under the laws of the State of California as applied to agreements
among California residents entered into and to be performed entirely within
California.
8. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
9. Titles and Subtitles. The titles and subtitles used in this
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
10. Notices. Unless otherwise provided, any notice required or
permitted under this Agreement shall be given in writing and shall be deemed
effectively given upon personal delivery to the party to be noticed or by
delivery by nationally-recognized overnight courier to the party to be notified
or upon deposit with the United States Post Office, by registered or certified
mail, postage prepaid and addressed to the party to be notified at the address
indicated for such party on the signature page hereof, or at such other address
as such party may designate by ten (10) days' advance written notice to the
other parties.
11. Amendments and Waivers. Any term of this Agreement may be
amended and the observance of any term of this Agreement may be waived (either
generally or in a particular instance and either retroactively or
prospectively), only with the written consent of the parties hereto.
12. Severability. If one or more provisions of this Agreement
are held to be unenforceable under applicable law, such provision shall be
excluded from this Agreement and replaced with the enforceable provision closest
in intent and economic
2.
<PAGE> 3
effect as the provision found to be unenforceable; provided however that no such
severability and replacement shall be effective if it materially changes the
economic benefit of this Agreement to any party hereto.
13. Entire Agreement. This Agreement constitutes the full and
entire understanding and agreement between the parties with regard to the
subjects hereof and thereof, and no party shall be liable or bound to any other
party in any manner by any warranties, representations or covenants except as
specifically set forth herein.
3.
<PAGE> 4
IN WITNESS WHEREOF, the undersigned have executed this
Agreement as of the date first written above.
ENDOSONICS CORPORATION
------------------------------------
Name:
Title:
Address:
CARDIOVASCULAR DYNAMICS, INC.
------------------------------------
Name:
Title:
Address:
4.
<PAGE> 1
EXHIBIT 10.14
TAX ALLOCATION AGREEMENT
This Tax Allocation Agreement (The "Agreement") is made as of this ____
day of ______, 1996, by and between EndoSonics Corporation, a Delaware
corporation ("EndoSonics") and CardioVascular Dynamics, Inc., a Delaware
Corporation ("CVD").
WHEREAS, EndoSonics is the common parent of an affiliated group of
corporations, as defined in section 1504(a) of the Internal Revenue code of
1986, as amended (the "Code"), of which the CVD is a member; and
WHEREAS, EndoSonics, on behalf of its affiliated group, has filed and
will file consolidated federal income tax returns and certain consolidated
and/or combined tax returns for state income tax purposes;
WHEREAS, it is anticipated that CVD will no longer be a member of
EndoSonics's federal consolidated group following an anticipated initial public
offering ("IPO") but may be a member of a consolidated, combining or unitary
group under state tax laws following the IPO;
WHEREAS, the parties wish to provide for the allocation among them of
tax liability and certain related matters;
NOW, THEREFORE, in consideration of the foregoing premises and of the
mutual covenants and agreements contained herein, the parties hereto agree as
follows:
1. DEFINITIONS
For purposes of this Agreement, the terms set forth below shall be
defined as follows:
(a) "CVD" shall mean (i) CVD, (ii) any corporation which succeeds to
and takes into account the net operating loss carryover and other tax attributes
of CVD in accordance with Internal Revenue Code Section 381(a), or (iii) any
affiliated group of corporations of which CVD is a member and with whom CVD
files consolidated federal income tax returns.
(b) "EndoSonics" shall mean and include (i) EndoSonics, (ii) any
successor common parent corporation described in Treas. Reg. Section
1.1502-75(d)(2)(i) or (2)(ii), or (iii) any corporation as to which EndoSonics
(or a successor corporation described in
<PAGE> 2
clause (ii) hereof) is the "predecessor" within the meaning of Treas. Reg.
Section1.1502-1(f)(1), if such corporation acquires EndoSonics (or a successor
corporation described in clause (ii) hereof) in a "reverse acquisition" within
the meaning of Treas. Reg. Section1.1502-75(d)(3).
(c) "EndoSonics Group" shall mean any group of corporations which files
a consolidated federal income tax return with EndoSonics.
(d) "IPO Date" shall mean the closing date of IPO.
(e) "Tax Payment" shall mean any payment required to be made by CVD or
EndoSonics to the other in accordance with the terms of this Agreement.
(f) "Tax Liability" shall mean any state or federal income tax
liability and shall include any interest or penalties assessed with respect to
any deficiency with respect thereto.
2. ALLOCATION OF FEDERAL TAX LIABILITY
EndoSonics and CVD agree and acknowledge that each has incurred
substantial net operating losses for federal income tax purposes (on both a
separate and consolidated basis) for all taxable years ending prior to the IPO
Date and that, as a result, neither has incurred any federal income tax
liability for any such year. EndoSonics and CVD further agree and acknowledge
that CVD has and will incur a net operating loss for its taxable year ending on
the IPO date. Based on such agreement and acknowledgments, CVD shall not be
required to make any Tax Payment to EndoSonics for any period ending prior to or
on the IPO Date or with respect to any EndoSonics Group consolidated federal
income tax returns or for the current taxable year, and EndoSonics will not be
required to make any Tax Payments to CVD with respect to such returns for such
periods.
3. ALLOCATION OF STATE TAX LIABILITY
A. EndoSonics and CVD agree and acknowledge that each has incurred
substantial net operating losses for state income tax purposes (on both a
separate and combined basis) for all taxable years ending prior to the IPO Date
and that, as a result, neither has incurred any state income tax liability for
any such year. EndoSonics and CVD further agree and acknowledge that CVD has and
will incur a net operating loss for its taxable year ending on the IPO date.
Based on such agreement and acknowledgments, CVD shall not be required to make
any Tax Payment to EndoSonics for any period ending prior to or on the IPO Date
or with respect to any state income taxes for the portion of the current taxable
ending on the IPO date, and EndoSonics will not be required to make any Tax
Payments to CVD with respect to state income tax for such periods.
<PAGE> 3
B. Notwithstanding that EndoSonics and CVD may be required to file any
consolidated or combined state income tax returns for any period ending after
the IPO Date, it is the intention of EndoSonics and CVD by this Agreement to
cause CVD's Tax Liability from and after the IPO Date to be the same as it would
have been had CVD filed separate returns for such periods. As a result, it is
intended that EndoSonics will realize any and all benefits and suffer any and
all detriments occasioned by such consolidated or combined reporting.
C. In keeping with the intention of EndoSonics as set forth above, a
Tax Payment shall be required to be made with respect to state income taxes
incurred in any state with respect to Periods occurring subsequent to the IPO
Date in which EndoSonics and CVD are required to file consolidated or combined
returns (i) by EndoSonics to CVD to the extent that CVD has a Net Increase in
Tax Liability to such state as a result of the filing of a consolidated or
combined return; or (ii) by CVD to EndoSonics to the extent that CVD has a Net
Decrease in Tax Liability to such state as a result of the filing a consolidated
return or report.
D. For purposes of this Paragraph 3, for each taxable year of CVD
ending after the IPO Date (treating the period commencing with the IPO Date
through the balance of the taxable year as a separate taxable year) and for each
jurisdiction in which EndoSonics and CVD are required to file a consolidated or
combined state income tax return, CVD shall prepare a hypothetical return on a
separate basis (the "Hypothetical Returns"). Such Hypothetical Returns shall be
prepared in a manner which is consistent with the methods of accounting and with
reporting of income, gain, loss or deduction by CVD for federal income tax
purposes. Such Hypothetical Return shall be prepared by CVD and delivered to
EndoSonics within 30 days of the date on which CVD has prepared and filed its
federal income tax return for such period. CVD shall bear the cost of preparing
the Hypothetical Returns except that, in any year in which CVD is required to
make a Tax Payment to EndoSonics, CVD may reduce the amount of such payment by
the costs directly incurred in preparing such Hypothetical Returns.
E. In the event that any adjustment is made to the federal income tax
return of CVD, CVD shall make a corresponding adjustment in its Hypothetical
Returns. Similarly, any adjustment to any consolidated or combined state income
tax return (other than an adjustment agreed to by EndoSonics without the consent
of CVD in accordance with Paragraph 8 hereof) shall require an appropriate
adjustment to the Hypothetical Returns. The Net Increase in Tax Liability for
any state shall mean the excess of (i) CVD's tax liability to such state in
accordance with the consolidated or combined return of EndoSonics and CVD, over
(ii) the tax shown on CVD's hypothetical return for such state. The Net Decrease
in Tax Liability for any state shall mean the excess of (i) the tax shown on
CVD's hypothetical return for such state, over (ii) CVD's tax liability to such
state under the consolidated or combined return of EndoSonics and CVD.
<PAGE> 4
4. PREPARATION AND FILING OF RETURNS
A. Subject to the provisions of Section 8(b) hereof, EndoSonics shall
include CVD with EndoSonics in a consolidated or combined return for any period
(including periods or portions of any period) following the IPO Date for which
EndoSonics determines that it is required to do so or for any period in which
EndoSonics, in its sole discretion, determines to do so and for which it
believes, in good faith, that it is eligible to do so. CVD shall execute and
file such consents, elections, powers of attorney and other documentation as may
be required or appropriate for the proper filing of such returns.
B. (I) With respect to any consolidated or combined return which
includes EndoSonics or CVD, EndoSonics shall have the right, in its sole
discretion, to (i) make any elections which are employed in the preparation and
filing of such returns, including any schedules and elections and choice of
methods of accounting and depreciation; (ii) determine the substance and manner
in which such returns (including schedules) shall be prepared and filed,
including without limitation, the substance and manner in which any item of
income, gain, loss, deduction or credit shall be reported; (ii) contest,
compromise, settle or otherwise control (at its own expense) any adjustment,
assessment or deficiency proposed, asserted or assessed as a result of any
audit, examination or other proceeding with respect to such returns; (iii) file,
prosecute, compromise or settle any claim for refund; and (iv) determine whether
any refunds which are available shall be paid by way of refund or credit against
the income tax liability.
(II) CVD hereby irrevocably agrees that EndoSonics is
authorized to act on CVD's behalf and as the exclusive agent and
attorney-in-fact for CVD for all tax matters arising in any state relating to a
taxable period for which EndoSonics and CVD prepared consolidated or combined
state income tax returns.
(III) Notwithstanding the above, EndoSonics shall not take any
position on a consolidated or combined state income tax return with respect to
any item of CVD income, gain, loss or deductions which is inconsistent with the
reporting of such item by CVD on its federal income tax return.
5. ALTERED FILING STATUS
A. In the event that a state taxing authority seeks to consolidate or
combine, under unitary tax principles or otherwise, the items of income and
deductions of CVD with those of EndoSonics (a "Unitary Claim") in a taxable
period (or portion thereof) following the IPO Date where EndoSonics did not
include CVD in such return, then EndoSonics shall be entitled (and CVD hereby
irrevocably authorizes EndoSonics) to control the defense, settlement or
compromise of any audit, examination, adjustment or other proceeding with such
taxing authority and CVD shall execute all powers of
<PAGE> 5
attorney and take all other action to permit EndoSonics to do so. CVD shall also
cooperate in any such proceeding. EndoSonics shall bear the full cost of any
such such defense, settlement or compromise. In the event that it is ultimately
determined that a consolidated or combined state income tax return is required,
Paragraph 3.B.(ii) shall apply as if such return had been originally filed.
B. In the event that a state taxing authority seeks to require separate
filings with respect to CVD in a year in which EndoSonics included CVD in a
consolidated or combined state income tax return (a "Separate Claim"), then
EndoSonics shall still be entitled (at its own expense) to (and CVD hereby
irrevocably authorizes EndoSonics) to control the defense, settlement or
compromise of any audit, examination, adjustment or other proceeding with such
taxing authority and CVD shall execute all powers of attorney and take all other
action to permit EndoSonics to do so. CVD shall also cooperate in any such
proceeding.
6. TIME FOR PAYMENT; DEFAULT INTEREST
A. Any Tax Payment required hereunder with respect to originally filed
consolidated or combined state income tax returns shall be paid on or before the
later to occur of (i) five (5) business days following the date on which CVD has
delivered to EndoSonics its Hypothetical Returns, or (ii) the date on which the
consolidated or combined return is filed. Any Tax Payment required as a result
of adjustments to a consolidated or combined state income tax return or any
Hypothetical Return, shall be made within five (5) business days of the date
that the adjustments giving rise to such Tax Payment have been paid or otherwise
become final.
B. Where a Tax Payment required by this Agreement to be made from one
party to another is not made within the time provided (or otherwise promptly
paid if no time is specified), the amount not timely paid shall bear interest at
the rate established pursuant to Section 6621(a)(2) of the Code.
C. Where a Tax Payment is required under the terms of this Agreement as
a result of an adjustment to any consolidated or combined state income tax
return or a Hypothetical Return, and the amount of the amount of the Tax Payment
is not otherwise based on a Tax Liability which includes an interest charge, the
amount of the Tax Payment shall bear interest from the date on which the payment
would have been due had the consolidated or combined state income tax return and
the Hypothetical Returns been originally prepared as so adjusted to the date on
which the payment is actually made. The interest shall be computed at the rate
established pursuant to Section 6621(a)(2) of the Internal Revenue Code.
<PAGE> 6
7. TERMINATION OF AFFILIATION
A. This Agreement shall survive any termination of affiliation.
B. EndoSonics and CVD shall consult and shall furnish each other with
such information as is required to prepare accurately any consolidated or
combined state income tax return required or permitted hereunder for any taxable
years.
C. EndoSonics and CVD shall also consult and furnish each other with
information concerning the status of any tax audit or tax refund claim relating
to a taxable year in which the result of such matter could affect the federal or
state Tax Liability of the other or which could result in an adjustment of any
Tax Payment required hereunder.
8. CONTROL OF AUDITS
A. EndoSonics shall have the exclusive right to control any and all
disputes affecting the Tax Liability of EndoSonics and or CVD with respect to
any state in which EndoSonics and CVD file consolidated or combined returns,
provided that no adjustment of an item of income, gain, loss or deduction shall
be reflected on the Hypothetical Returns of CVD prepared in accordance with
Paragraph 3.C unless CVD shall have consented to such adjustment in accordance
with Paragraph 8.B.
B. In the event that an adjustment is made or proposed to be made to an
item of income, gain, loss or deduction reflected in the separate return of CVD
and EndoSonics requests CVD to consent to such adjustment, CVD shall not
unreasonably withhold consent. For this purpose, consent will be deemed to have
been reasonably withheld if CVD has obtained advice of counsel or other tax
advisor that the treatment of the item as reported on their separate return is
at least as likely as not to be the correct treatment of the item for applicable
tax purposes.
C. In the event that CVD withholds consent to any proposed adjustment,
CVD shall thereafter bear the costs or resisting such adjustment. If the
proposed adjustment can be reasonably separated from other matters involved in
the audit without undue cost or delay, CVD shall assume responsibility for
disputing the adjustment and shall pay such costs as it may incur in connection
with such dispute. If the matter cannot be reasonably separated from other
disputed matters which continue to be the subject of dispute, CVD shall pay such
costs as are directly traceable to such item.
9. RESOLUTION OF DISPUTES BETWEEN PARTIES
A. The parties shall attempt to resolve any disputes in a manner
consistent with the provisions hereof as quickly as possible. To the extent they
are unable to do so, and the dispute relates to the calculation or allocation of
any tax liability, the matter
<PAGE> 7
shall be referred to a mutually agreeable accounting firm or law firm (the
"Firm") for binding arbitration. The parties agree to share equally the expenses
of the Firm.
B. Other than with respect to the taxable period that includes the day
after the IPO Date, CVD shall have the right to challenge prospectively
EndoSonics's decision to include CVD in a Post-IPO-Unitary Return. To the extent
CVD and EndoSonics are unable to resolve this issue, it shall be resolved by
either (i) seeking a ruling (at the expense of CVD) on this issue; or (ii)
referring to the Firm. The standard for decision (other than by ruling) shall be
whether it is "more likely than not" that a Unitary Return cannot be filed.
10. MISCELLANEOUS PROVISIONS
A. This Agreement shall become effective on the IPO Date and shall
continue in effect until such time as (i) the parties mutually agree to its
termination or (ii) there is no longer any possibility that any Tax Payment
would be required hereunder. Specifically, this Agreement shall continue in
effect for the period described above notwithstanding that EndoSonics and CVD
have ceased to file any consolidated or combined state income tax returns.
B. This Agreement contains the entire understanding of the parties
hereto with respect to the subject matter contained herein and supersedes all
prior written, oral or implied understandings, representations and agreements
among the parties with respect thereto except with respect to the agreements
attached as appendices hereto which shall continue in effect to the extent
provided for herein. No alteration, amendment, or modification of any of the
terms of this Agreement shall be valid unless made by an instrument signed in
writing by an authorized officer of each party.
C. This Agreement shall be binding upon and inure to the benefit of
each party hereto, its respective successors and assigns.
D. This Agreement is intended solely to benefit EndoSonics and CVD. No
other person shall be a third party beneficiary hereof.
E. Except with respect to the determination of any Tax Liability, this
Agreement shall be governed by, interpreted and enforced in accordance with the
laws of the State of California (regardless of the laws that might be applicable
under principles of conflicts of laws).
F. This Agreement may be executed in counterparts, each of which shall
be deemed an original, but all of which together shall constitute one and the
same instrument.
<PAGE> 8
G. Any notice or other communication required or permitted under this
Agreement shall be in writing and shall be personally delivered or sent by
certified or registered United States mail postage prepaid, to the parties at
the following addresses (or at such other address as a party may specify by
notice to the others):
If to EndoSonics:
EndoSonics Corporation
6616 Owens Drive
Pleasanton, CA 94588
Attn: Donald Huffman
If to CVD:
CardioVascular Dynamics, Inc.
13900 Alton Parkway
Suite 122
Irvine, CA 92718
Attn: Dana Nickell
Any such notice or communication shall be effective and be deemed to have been
given as of the dates delivered or mailed, as the case may be; provided that any
notice or communication changing any of the addresses set forth above shall be
effective and deemed to have been given only upon its receipt.
H. Where the context so requires, the word "person" shall include a
corporation, firm, partnership or other form of association or entity.
I. If any provision of this Agreement shall be judicially determined to
be unenforceable, such provision shall be deemed deleted herefrom only with
respect to (and only to the extent of) the jurisdiction where such adjudication
was made but such adjudication shall not otherwise affect the terms of this
Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed on the date first above written.
ENDOSONICS CORPORATION
By:
------------------------------
CARDIOVASCULAR DYNAMICS, INC.
By:
------------------------------
<PAGE> 1
EXHIBIT 10.16
WAIVER AND GRANT OF WARRANT
This WAIVER AND GRANT OF WARRANT (hereafter the "Agreement")
is entered into this 2nd day of May, 1996 by and among SCIMED Life Systems,
Inc., a Minnesota corporation ("SCIMED"), Cardiovascular Dynamics, Inc. a
Delaware corporation ("CVD") and Endosonics Corporation, a Delaware corporation
("Endosonics").
RECITALS:
WHEREAS, SCIMED, CVD and Endosonics are parties to a Stock
Purchase and Technology License Agreement dated September 10, 1994, as amended
on September 29, 1995 (the "License Agreement");
WHEREAS, pursuant to Section 6.2 of the License Agreement,
SCIMED has certain antidilution protections with respect to issuances of
securities by CVD;
WHEREAS, CVD desires to increase the number of shares of CVD's
Common Stock available for issuance under its 1995 Stock Option Plan;
WHEREAS, SCIMED has agreed to a one time waiver of its
antidilution protections with respect to the increase in CVD's 1995 Stock Option
Plan and in exchange therefor to be granted a warrant by CVD pursuant to the
terms set forth herein;
NOW, THEREFORE, in consideration of the foregoing Recitals and
the mutual covenants, representations and warranties contained in this
Agreement, SCIMED, CVD and ENDOSONICS agree as follows:
1. WAIVER OF ANTIDILUTION PROVISIONS.
SCIMED hereby agrees to waive, effective at the Closing (as
defined below), the Antidilution Provisions set forth in Section 6.2 of the
License Agreement with respect to the increase in CVD's 1995 Stock Option Plan
of 400,000 shares of Common Stock, (after taking into account the 2-for-1 stock
split authorized by the Company's stockholders on May 1, 1996) the grant of
stock options thereunder, and the issuance of up to 1,200,000 shares of Common
Stock pursuant to the exercise of options granted pursuant to the Stock Option
Plan (the "Waiver").
2. GRANT OF WARRANT.
In exchange for the Waiver set forth in Section 1 hereof, CVD
agrees to issue, at the Closing, a warrant to SCIMED to purchase up to 20,000
shares of Series A Preferred Stock of CVD at an exercise price of $6.58 per
share (the "Warrant"). The Warrant shall expire on May 2, 1998 and shall be in
substantially the form attached hereto as Exhibit A. The Company agrees that in
the event all of the Company's Preferred Stock is automatically converted into
Common Stock, in order to reflect the 2-
<PAGE> 2
for-1 stock split authorized by the Company's stockholders on May 1, 1996, the
Warrant shall become exercisable for 40,000 shares of Common Stock at an
exercise price of $3.29 per share.
3. CLOSING.
The Waiver and the issuance of the Warrant shall take place as
soon as practical after satisfaction of the conditions set forth in Section 5
hereof.
4. SCIMED COVENANTS.
SCIMED hereby agrees to execute a CVD Shareholder consent
approving the 400,000 share increase (on a post-split basis) to CVD's 1995 Stock
Option Plan (the "Plan") as submitted to SCIMED on May 1, 1996.
5. CONDITIONS TO CVD AND ENDOSONICS' OBLIGATIONS AT CLOSING.
SCIMED shall have executed the Board and Shareholder consents
referred to in Section 4 hereof.
6. WAIVER OF COVENANT.
SCIMED hereby waives the covenant contained in Section 6(i) of
that certain Waiver and Grant of Warrant by and between CVD and SCIMED, dated
June 30, 1995 with respect to the aggregate average exercise price of the
options granted under CVD Plan.
7. COVENANTS REGARDING STOCK OPTION PLAN.
CVD shall not issue options to employees of Endosonics who are
not also employees of CVD.
8. REGISTRATION AND EXCHANGE RIGHTS.
SCIMED, CVD and Endosonics acknowledge and agree that all
shares issuable upon exercise of the Warrant shall be subject to the
registration rights set forth in Section 6.1(a)(and Schedule 6.1 incorporated
therein) of the License Agreement. In addition, all shares of Series A Preferred
Stock purchasable upon exercise of the Warrant shall be subject to the Exchange
Option contained in Section 6.1(b) of the License Agreement. Pursuant to the
Exchange Option, SCIMED shall have the option to exchange each share of CVD
stock for shares of Endosonics' common stock (valued at a price determined
pursuant to Section 6.1(b) of the License Agreement) at an exchange rate of
$6.58 per share (to be adjusted for stock splits as provided for in the License
Agreement).
<PAGE> 3
9. MISCELLANEOUS.
a. Subject to the provisions of Section 8(e) below,
this Agreement, the attachments hereto and the documents referenced herein
constitute the entire agreement among the parties relating to the subject matter
hereof, and all prior negotiations, representations, agreements and
understandings with respect to the Restated Certificate and the Plan are
superseded hereby. No agreements altering, amending or supplementing the terms
hereof may be made except by means of a written document signed by all of the
parties hereto.
b. In the event any provision of this Agreement shall
be determined unenforceable under applicable law, that provision shall be
modified or deleted to the extent necessary for such provision to conform with
applicable law, but the remaining provisions of this Agreement shall remain in
full force and effect.
c. This Agreement shall be governed by the laws of
Minnesota, without regard to its choice of laws or conflicts of law provisions.
d. This Agreement may be executed in counterparts,
each copy of which shall for all purposes be deemed an original.
e. The waiver contained in Section 1 above is a
one-time waiver only and all of SCIMED's rights under Section 6.2 of the License
Agreement shall remain in full force and effect with respect to any event giving
rise to the anti-dilution protections contained in Section 6.2 Except for (i)
the one-time waiver of the anti-dilution provisions contemplated by Section 1
hereof and (ii) the addition of Series A Preferred Stock to be covered by the
registration rights of Section 6.1(a) and the exchange option of Section 6.1(b)
of the License Agreement pursuant to Section 7 hereof, all terms and conditions
of the License Agreement remain in full force and effect and unchanged hereby.
<PAGE> 4
IN WITNESS WHEREOF, the parties have executed this Agreement
to be executed as of the day and year first above written.
SCIMED LIFE SYSTEMS, INC.
By: /s/ Michael Berman
----------------------------
Name: Michael Berman
-------------------------
Title: President
------------------------
CARDIOVASCULAR DYNAMICS, INC.
By: /s/ D. P. Nickell
----------------------------
Name: Dana Nickell
-------------------------
Title: Vice President
------------------------
ENDOSONICS CORPORATION
By: /s/ Donald D. Huffman
----------------------------
Name: Donald D. Huffman
-------------------------
Title: Vice President and
Chief Financial Officer
------------------------
<PAGE> 5
THE WARRANT REPRESENTED BY THIS CERTIFICATE HAS NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AND SUCH WARRANT MAY NOT BE SOLD OR
TRANSFERRED UNLESS SUCH SALE OR TRANSFER IS IN ACCORDANCE WITH THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AT THE TIME AMENDED, OR IN
CONFORMITY WITH THE LIMITATIONS OF RULE 144 OR SIMILAR RULE AS THEN IN EFFECT
UNDER SUCH ACT, OR UNLESS SOME OTHER EXEMPTION FROM THE REGISTRATION
REQUIREMENTS OF SUCH ACT IS AVAILABLE WITH RESPECT THERETO.
Warrant No. 2 Warrant to Purchase
Series A Preferred Stock
CARDIOVASCULAR DYNAMICS, INC.
SERIES A PREFERRED STOCK WARRANT
Void after May 2, 1998
Cardiovascular Dynamics, Inc., a Delaware corporation (the
"Company"), hereby certifies that, for value received, SCIMED Life Systems,
Inc., or its assigns, is entitled, subject to the terms set forth below, to
purchase from the Company at any time or from time to time on or before 5:00 PM
Pacific time, May 2, 1998 (the "Expiration Date"), 20,000 shares of the
Company's Series A Preferred Stock at a price per share equal to $6.58.
I. EXERCISE OF WARRANT; PARTIAL EXERCISE. This Warrant may be
exercised in full or in part by the holder hereof by surrender of this Warrant,
with the form of subscription attached hereto duly executed by such holder, to
the Company at its principal office, accompanied by payment, in cash or by
certified or official bank check payable to the order of the Company, of the
purchase price of the shares to be purchased hereunder. For any partial exercise
hereof, the holder shall designate in the subscription the number of shares of
Series A Preferred Stock that it wishes to purchase. On any such partial
exercise, the Company at its expense shall forthwith issue and deliver to the
holder hereof a new warrant of like tenor, in the name of the holder hereof,
which shall be exercisable for such number of shares of Series A Preferred Stock
represented by this Warrant which have not been purchased upon such exercise.
II. WHEN EXERCISE EFFECTIVE. The exercise of this Warrant
shall be deemed to have been effected immediately prior to the close of business
on the business day on which this Warrant is surrendered to the Company as
provided in Section 1, and at such time the person in whose name any certificate
for shares of Series A Preferred Stock shall be issuable upon such exercise, as
provided in Section 3, shall be deemed to be the record holder of such Series A
Preferred Stock for all purposes.
III. DELIVERY ON EXERCISE. As soon as practicable after the
exercise of this Warrant in full or in part, and in any event within five (5)
business days thereafter, the Company at its expense (including the payment by
it of any applicable issue taxes) will cause to be issued in the name of and
delivered to the holder hereof, or as such holder may direct, a certificate or
certificates for the number of fully paid and nonassessable shares of Series A
Preferred Stock to which such holder shall be entitled on such exercise.
<PAGE> 6
IV. ADJUSTMENT OF PURCHASE PRICE AND NUMBER OF SHARES.
The character of the shares of stock or other securities at the time issuable
upon exercise of this Warrant and the purchase price therefor, are subject to
adjustment upon the occurrence of the following events:
A. ADJUSTMENT FOR STOCK SPLITS, STOCK DIVIDENDS,
RECAPITALIZATIONS, ETC. The exercise price of this Warrant and the number of
shares of stock or other securities at the time issuable upon exercise of this
Warrant shall be appropriately adjusted to reflect any stock dividend, stock
split, combination of shares, reclassification, recapitalization or other
similar event affecting the number of outstanding shares of stock or securities.
B. CONVERSION OF SERIES A PREFERRED STOCK. Should all
of the Company's outstanding Series A Preferred Stock be, at any time prior to
the expiration of this Warrant, converted into shares of the Company's Common
Stock in accordance with the Company's Certificate of Incorporation, as amended
and/or restated and effective immediately prior to the conversion of all of the
Company's Series A Preferred Stock (the "Certificate"), then this Warrant shall
immediately become exercisable for that number of shares of the Company's Common
Stock equal to the number of shares of Common Stock which would have been
received if this Warrant had been exercised in full and the Warrant Stock
received thereupon had been simultaneously converted into Common Stock
immediately prior to such event. The per share purchase price shall be
immediately adjusted to equal the quotient obtained by dividing (x) the
aggregate purchase price of the number of shares of Series A Preferred Stock for
which this Warrant was exercisable immediately prior to such conversion by (y)
the number of shares of Common Stock for which this Warrant is exercisable
immediately after such conversion.
C. ADJUSTMENT FOR REORGANIZATION, CONSOLIDATION,
MERGER, ETC. In case of any consolidation or merger of the Company with or into
any other corporation, entity or person, or any other corporate reorganization,
in which the Company shall not be the continuing or surviving entity of such
consolidation, merger or reorganization (any such transaction being hereinafter
referred to as a "Reorganization"), then, in each case, the holder of this
Warrant, on exercise hereof at any time after the consummation or effective date
of such Reorganization (the "Effective Date"), shall receive, in lieu of the
shares of stock or other securities at any time issuable upon the exercise of
the Warrant issuable on such exercise prior to the Effective Date, the stock and
other securities and property (including cash) to which such holder would have
been entitled upon the Effective Date if such holder had exercised this Warrant
immediately prior thereto (all subject to further adjustment as provided in this
Warrant).
D. CERTIFICATE AS TO ADJUSTMENTS. In case of any
adjustment or readjustment in the price or kind of securities issuable on the
exercise of this Warrant, the Company will promptly give written notice thereof
to the holder of this Warrant in the form of a certificate, certified and
confirmed by the Board of Directors of the Company, setting forth such
adjustment or readjustment and showing in reasonable detail the facts upon which
such adjustment or readjustment is based.
V. NOTICES OF RECORD DATE, ETC. In the event of
A. any taking by the Company of a record of the
holders of any class of securities for the purpose of determining the holders
thereof who are entitled to receive any dividend or other distribution, or any
right to subscribe for, purchase or otherwise acquire any shares of stock of any
class or any other securities or property,
B. any capital reorganization of the Company, any
reclassification or recapitalization of the capital stock of the Company, or any
transfer of all or substantially all the assets of the Company to or
consolidation or merger of the Company with or into any other person, or
2.
<PAGE> 7
C. any voluntary or involuntary dissolution,
liquidation or winding-up of the Company,
then and in each such event the Company will mail to the holder hereof a notice
specifying (i) the date on which any such record is to be taken for the purpose
of such dividend, distribution or right, and stating the amount and character of
such dividend, distribution or right and (ii) the date on which any such
reorganization, reclassification, recapitalization, transfer, consolidation,
merger, dissolution, liquidation or winding-up is to take place, and the time,
if any is to be fixed, as of which the holders of record of shares of stock or
other securities at the time issuable upon the exercise of this Warrant shall be
entitled to exchange their shares for securities or other property deliverable
on such reorganization, reclassification, recapitalization, transfer,
consolidation, merger, dissolution, liquidation or winding-up. Such notice shall
be mailed at least twenty (20) days prior to the date therein specified.
VI. EXCHANGE OF WARRANTS. Subject to the transfer condition
referred to in the legend endorsed hereon, on surrender for exchange of this
Warrant, properly endorsed, to the Company, the Company at its expense will
issue and deliver to or on the order of the holder thereof a new Warrant of like
tenor, in the name of such holder or as such holder may direct, calling in the
aggregate on the face thereof for the number of shares of Series A Preferred
Stock called for on the face of the Warrant so surrendered.
VII. REPLACEMENT OF WARRANTS. On receipt by the Company of
evidence reasonably satisfactory to the Company of the loss, theft, destruction
or mutilation of this Warrant and, in the case of any such loss, theft or
destruction of this Warrant, on delivery of an indemnity agreement reasonably
satisfactory in form and amount to the Company or, in the case of any such
mutilation, on surrender and cancellation of such Warrant, the Company at its
expense will execute and deliver, in lieu thereof, a new Warrant of like tenor.
VIII. INVESTMENT INTENT. Unless a current registration
statement under the Securities Act of 1933, as amended, shall be in effect with
respect to the securities to be issued upon exercise of this Warrant, the holder
thereof, by accepting this Warrant, covenants and agrees that, at the time of
exercise hereof, and at the time of any proposed transfer of securities acquired
upon exercise hereof, such holder will deliver to the Company a written
statement that the securities acquired by the holder upon exercise hereof are
for the own account of the holder for investment and are not acquired with a
view to, or for sale in connection with, any distribution thereof (or any
portion thereof) and with no present intention (at any such time) of offering
and distributing such securities (or any portion thereof).
IX. TRANSFER. Subject to the transfer conditions referred to
in the legend endorsed hereon, this Warrant and all rights hereunder are
transferrable, in whole or in part, without charge to the holder hereof upon
surrender of this Warrant with a properly executed assignment (in the form
annexed hereto) at the principal office of the Company. Upon any partial
transfer, the Company will at its expense issue and deliver to the holder hereof
a new Warrant of like tenor, in the name of the holder hereof, which shall be
exercisable for such number or amount of Series A Preferred Stock which were not
so transferred.
X. NO RIGHTS OR LIABILITY AS A SHAREHOLDER. This Warrant does
not entitle the holder hereof to any voting rights or other rights as a
shareholder of the Company. No provisions hereof, in the absence of affirmative
action by the holder hereof to purchase Series A Preferred Stock, and no
enumeration herein of the rights or privileges of the holder hereof shall give
rise to any liability of such holder as a shareholder of the Company.
XI. NOTICES. All notices referred to in this Warrant shall be
in writing and shall be delivered personally or by certified or registered mail,
return receipt requested, postage prepaid and will be deemed to have been given
when so delivered or mailed (i) to the Company, at its principal executive
offices
3.
<PAGE> 8
and (ii) to the holder of this Warrant, at such holder's address as it appears
in the records of the Company (unless otherwise indicated by such holder).
XII. MISCELLANEOUS. This Warrant and any term hereof may be
changed, waived, discharged or terminated only by an instrument in writing
signed by the party against which enforcement of such change, waiver, discharge
or termination is sought. This Warrant is being delivered in the State of
California and shall be governed by and construed and enforced in accordance
with the internal laws of the State of California (without reference to any
principles of the conflicts of laws). The headings in this Warrant are for
purposes of reference only, and shall not limit or otherwise affect any of the
terms hereof.
Dated: May 2, 1996.
CARDIOVASCULAR DYNAMICS, INC..
By /s/ D.P. Nickell
-----------------------------
Name Dana Nickell
----------------------------
Title Vice President
---------------------------
4.
<PAGE> 9
ATTACHMENT A TO WARRANT
FORM OF SUBSCRIPTION
(To be signed only on exercise of Warrant)
To CARDIOVASCULAR DYNAMICS, INC.
The undersigned, the holder of the within Warrant, hereby
irrevocably elects to exercise the purchase rights represented by such Warrant
for, and to purchase thereunder, * shares of
of CARDIOVASCULAR DYNAMICS, INC., and herewith makes payment
of $ therefor, and requests that the certificates for such shares
be issued in the name of, and delivered to , whose address is
.
--------------------------------------------------
(Signature must conform in all respects to name
of holder as specified on the face of the Warrant)
--------------------------------------------------
--------------------------------------------------
(Address)
Dated:
--------------------
- -----------------
* Insert here the number of shares as to which the Warrant is being exercised.
<PAGE> 10
ATTACHMENT B TO WARRANT
FORM OF ASSIGNMENT
(To be signed only on transfer of Warrant)
For value received, the undersigned hereby sells, assigns,
and transfers unto the right represented by the
within Warrant to purchase shares of of
CARDIOVASCULAR DYNAMICS, INC., to which the within Warrant relates, and
appoints Attorney to transfer such right on the books
of with full power of substitution in the
premises.
--------------------------------------------------
(Signature must conform in all respects to name
of holder as specified on the face of the Warrant)
--------------------------------------------------
--------------------------------------------------
(Address)
Dated:
- -----------------
* Insert here the number of shares as to which the Warrant is being exercised.
<PAGE> 1
EXHIBIT 11.1
CARDIOVASCULAR DYNAMICS, INC.
STATEMENT REGARDING THE COMPUTATION OF PRO FORMA NET LOSS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE-MONTH
YEAR ENDED PERIOD ENDED
DECEMBER 31, MARCH 31,
------------------ -----------------------
1994 1995 1995 1996
------ ------- ------ ------------
<S> <C> <C> <C> <C>
Net loss.......................................... $ (971) $(2,874) $ (625) $ (377)
====== ======= ====== ==========
Computations of weighted average Common and Common
equivalent shares outstanding:
Weighted average common shares outstanding...... 3,471 333 1,333 --
Shares related to staff accounting bulletin
topic 4D:
Stock options................................ 318 318 318 318
Preferred Stock Warrants(1).................. 87 87 87 87
Adjusted to reflect the effect of the assumed
conversion of Preferred Stock from the date
of issuance (Series A and B)................. -- 3,667 2,667 4,017
Adjusted to reflect the effect of the assumed
conversion of the Convertible Obligation at
an assumed initial public offering price of
$12.00....................................... -- 36 -- 63
------ ------- ------ ------------
Shares used in computing pro forma net loss per
share........................................... 3,876 4,441 4,405 4,485
====== ======= ====== ==========
Pro forma net loss per share...................... $(0.25) $ (0.65) $(0.14) $(0.08)
====== ======= ====== ==========
</TABLE>
- ---------------
(1) At an assumed conversion rate of two shares of Common Stock for each share
of Preferred Stock.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Selected
Financial Data" and "Experts" and to use of our report dated March 15, 1996,
except for Note 11, as to which the date is May 13, 1996 in Amendment No. 2 to
the Registration Statement (Form S-1) and related Prospectus of CardioVascular
Dynamics, Inc. for the registration of 3,910,000 shares of its Common Stock.
Our audits also included the financial statement schedule of CardioVascular
Dynamics, Inc. listed in Item 16(b). This schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audits. In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
ERNST & YOUNG LLP
Palo Alto, California
June 6, 1996
