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SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act
of 1934 (Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement [ ] Confidential, For Use of
[X] Definitive Proxy Statement the Commission Only
[ ] Definitive Additional Materials (as permitted by
[ ] Soliciting Material Pursuant to Rule 14a-6(e))
Rule 14a-11(c) or Rule 14a-12
CardioVascular Dynamics, Inc
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if Other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
[X] Fee paid previously with preliminary materials:...............$2,780.00
[ ] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting
fee was paid previously. Identify the previous filing by registration
statement number, or the form or schedule and the date of its filing.
1) Amount previously paid:
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4) Date Filed:
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CARDIOVASCULAR DYNAMICS, INC.
13700 ALTON PARKWAY, SUITE 160
IRVINE, CALIFORNIA 92618
------------------------
December 17, 1998
Dear Stockholder:
I am pleased to invite you to attend a special meeting of stockholders of
CardioVascular Dynamics, Inc. ("CVD") on:
Thursday, January 14, 1999
10:00 a.m.
13700 Alton Parkway,
Suite 160,
Irvine, California
THIS IS A VERY IMPORTANT MEETING THAT AFFECTS YOUR INVESTMENT IN CVD.
At this meeting you will be asked to vote on three proposals:
1. To approve the issuance of Common Stock of CVD in exchange for all
outstanding shares of, and options for, the capital stock of Radiance
Medical Systems, Inc. ("Radiance") in the related Merger between CVD/RMS
Acquisition Corp., a wholly-owned subsidiary of CVD, and Radiance. In the
Merger, CVD will pay the stockholders of Radiance $3.00 for each share of
Preferred Stock of Radiance and $2.00 for each share of Common Stock of
Radiance. There are 2,133,622 shares of Preferred Stock of Radiance
(excluding shares currently owned by CVD) and 315,000 shares of Common
Stock of Radiance outstanding. Each Radiance optionholder will receive
options to purchase CVD Common Stock. In addition, each Radiance
stockholder and optionholder may receive milestone payments and additional
payments upon the occurrence of specified events. Stockholders of Radiance
Common Stock and optionholders will receive CVD Common Stock as payment for
their shares; stockholders of Radiance Preferred will receive CVD Common
Stock and, at CVD's option and under specified conditions, may receive cash
as well. The total value of the CVD Common Stock to be issued to the
Radiance stockholders at the Closing of the Merger will be approximately
$7.0 million. In addition, existing options to purchase shares of Radiance
Common Stock will be assumed and converted into options to purchase shares
of CVD Common Stock with value of $1.1 million. Assuming all product
development milestones are met on scheduled dates, and there is no
adjustment upon registration of the CVD Common Stock with the SEC, an
additional amount of approximately $6.9 million of CVD Common Stock will be
issued to Radiance stockholders and optionholders. The exact number of
shares of CVD Common Stock to be issued will depend on the value of CVD
Common Stock at the time of each issuance. Payment of the Merger
Consideration by CVD will result in significant dilution to CVD
stockholders.
An independent committee of CVD's Board of Directors composed of
Franklin D. Brown, William G. Davis and Edward M. Leonard, have determined
that the Merger is fair to you and in your best interests. In addition, the
independent committee has received a written opinion from Wedbush Morgan
Securities to the effect that the Merger consideration to be paid to
Radiance stockholders is fair from a financial point of view. The
independent committee has approved the Merger agreement unanimously and the
Merger and recommends that you vote to approve the issuance of CVD Common
Stock and the related Merger.
2. To approve a change of CVD's name from CardioVascular Dynamics,
Inc. to Radiance Medical Systems, Inc.
3. To approve an amendment to CVD's 1996 Stock Option/Stock Issuance
Plan to increase the number of shares available for issuance by an
additional 750,000 shares of Common Stock.
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Because of the significance of the Merger, your participation in the
special meeting, in person or by proxy, is especially important. The issuance of
the CVD Common Stock and related Merger cannot be completed unless the
stockholders of CVD approve it. Whether or not you plan to attend the meeting in
person, we urge you to mark, sign and return the enclosed proxy card promptly in
the enclosed postage-paid envelope to ensure that your shares of CVD stock will
be represented at the special meeting. If you do attend, you will, of course, be
able to vote your shares in person.
Thank you, and we look forward to seeing you at the special meeting.
Very truly yours,
[SIG]
Jeffrey F. O'Donnell
Chief Executive Officer and President
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CARDIOVASCULAR DYNAMICS, INC.
13700 ALTON PARKWAY, SUITE 160
IRVINE, CALIFORNIA 92618
------------------------
TO THE STOCKHOLDERS OF CARDIOVASCULAR DYNAMICS, INC.
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD JANUARY 14, 1999 10:00 A.M.
13700 ALTON PARKWAY, SUITE 160, IRVINE, CALIFORNIA
The Board of Directors of CardioVascular Dynamics, Inc. ("CVD") asks you to
attend this special meeting of CVD stockholders to vote on the following:
1. Proposed Issuance of Stock and Related Merger. You will be asked to
vote on the proposed issuance of CVD Common Stock and, at CVD's option,
cash in exchange for the outstanding capital stock of Radiance Medical
Systems, Inc. ("Radiance"), in the Merger between CVD, CVD/RMS Acquisition
Corp. and Radiance;
2. Change of Name. You will be asked to vote on a proposal to approve
and adopt an amendment (the "Amendment") to the Certificate of
Incorporation of CVD to change the name of CVD from CardioVascular
Dynamics, Inc. to Radiance Medical Systems, Inc;
3. Amendment of Stock Option Plan. You will be asked to vote to
approve an amendment to CVD's 1996 Stock Option/Stock Issuance Plan to
increase the number of shares available for issuance by an additional
750,000 shares of Common Stock; and
4. Other Business. You may be asked to consider and vote on any
matters that properly come before the meeting or any adjournments or
postponements of the meeting.
Only stockholders who hold their stock at the close of business on December
11, 1998 are entitled to notice of and to vote at the special meeting or any
adjournments or postponements of the meeting.
By Order of the Board of Directors,
CARDIOVASCULAR DYNAMICS, INC.
[SIG]
Jeffrey F. O'Donnell
Chief Executive Officer and President
December 17, 1998
Irvine, California
WE INVITE YOU TO ATTEND THE SPECIAL MEETING BECAUSE IT IS IMPORTANT THAT
YOUR SHARES BE REPRESENTED AT THE MEETING. PLEASE MARK, SIGN, DATE AND RETURN
THE ENCLOSED PROXY CARD IN THE ACCOMPANYING POSTAGE-PAID ENVELOPE. IF YOU ATTEND
THE MEETING, YOU MAY PERSONALLY VOTE, WHICH WILL REVOKE YOUR SIGNED PROXY. YOU
MAY ALSO REVOKE YOUR PROXY AT ANY TIME BEFORE THE MEETING EITHER IN WRITING OR
BY PERSONAL NOTIFICATION.
<PAGE> 5
CARDIOVASCULAR DYNAMICS, INC.
13700 ALTON PARKWAY, SUITE 160
IRVINE, CALIFORNIA 92618
------------------------
PROXY STATEMENT
------------------------
SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD JANUARY 14, 1999
The Boards of Directors of CardioVascular Dynamics, Inc. ("CVD") and
Radiance Medical Systems, Inc. ("Radiance") have agreed to merge (the "Merger")
Radiance with a wholly-owned subsidiary of CVD ("Sub"), which will result in
Radiance becoming a wholly-owned subsidiary of CVD. CVD will pay the
stockholders of Radiance $3.00 per share of Series A Preferred Stock of Radiance
and $2.00 for each share of Common Stock of Radiance. There are 2,133,622 shares
of Preferred Stock of Radiance (excluding shares currently owned by CVD) and
315,000 shares of Common Stock of Radiance outstanding. In addition, Radiance
stockholders may receive milestone payments of up to $2.00 for each share of
Series A Preferred Stock and $3.00 for each share of Common Stock based on the
occurrence of events related to regulatory approval, and an additional adjusted
payment upon registration of the CVD Common Stock with the Securities and
Exchange Commission (the "SEC"). Holders of Radiance Common Stock will receive
CVD Common Stock for their shares. Holders of Radiance Series A Preferred Stock
will receive CVD Common Stock and, at CVD's option, may receive up to 30% of the
aggregate payment in cash. The total value of the CVD Common Stock to be issued
to the Radiance stockholders at the Closing of the Merger will be approximately
$7.0 million. In addition, existing options to purchase shares of Radiance
Common Stock will be assumed and converted into options to purchase shares of
CVD Common Stock with value of $1.1 million. Assuming all product development
milestones are met on scheduled dates, and there is no adjustment upon
registration of the CVD Common Stock with the SEC, an additional amount of
approximately $6.9 million of CVD Common Stock will be issued to Radiance
stockholders and optionholders. The exact number of shares of CVD Common Stock
to be issued will depend on the value of CVD Common Stock at the time of each
issuance. Payment of the Merger Consideration by CVD will result in significant
dilution to CVD stockholders.
The Board of Directors of CVD is proposing two additional items for
approval by the stockholders at this special meeting, both of which only would
be effective upon completion of the Merger. First, the Board of Directors is
proposing that CVD adopt an amendment to its Certificate of Incorporation to
change its name from CardioVascular Dynamics, Inc. to Radiance Medical Systems,
Inc. Second, the Board of Directors is proposing to amend CVD's 1996 Stock
Option/Stock Issuance Plan to increase the number of shares available for
issuance by an additional 750,000 shares of Common Stock.
If the stockholders approve the issuance of CVD Common Stock and the
related Merger without also approving the change of name and/or amendment to the
1996 Stock Option/Stock Issuance Plan, the issuance and Merger will be completed
and CVD will adopt Radiance Medical Systems, Inc. as a name under which it does
business but its corporate name will remain CardioVascular Dynamics, Inc. If the
issuance of the CVD Common Stock and related Merger are not approved but
stockholders approve the change of name and/or the amendment to the 1996 Stock
Option/Stock Issuance Plan, the approval will not be effective and no change of
name or amendment to the 1996 Stock Option/Stock Issuance Plan will occur.
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The issuance of CVD Common Stock and the related Merger, and the change of
name and amendment to the 1996 Stock Option/Stock Issuance Plan, cannot be
completed unless CVD stockholders approve the proposals. The Board of Directors
of CVD has scheduled a special meeting for CVD stockholders to vote on the
proposals as follows:
Thursday, January 14, 1999
10:00 a.m.
13700 Alton Parkway,
Suite 160,
Irvine, California
CVD intends to mail this Proxy Statement and the accompanying proxy card on
or about December 15, 1998 to all stockholders entitled to vote at the special
meeting. CVD's principal executive offices are located at 13700 Alton Parkway,
Suite 160, Irvine, California 92618. The telephone number at that address is
(949) 457-9546.
THE DATE OF THIS PROXY STATEMENT IS DECEMBER 17, 1998.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SUMMARY..................................................... 4
The Companies............................................. 4
Our Reasons for the Issuance of Stock and the Related
Merger................................................. 5
The Merger................................................ 8
Name Change from CVD to Reliance.......................... 12
Amendment of Option Plan.................................. 12
INFORMATION CONCERNING SOLICITATION AND VOTING.............. 13
ADDITIONAL INFORMATION...................................... 15
PROPOSAL 1: TO APPROVE THE ISSUANCE OF CVD COMMON STOCK AND
THE RELATED MERGER........................................ 16
General.............................................. 16
Background of the Merger............................. 16
Reasons for the Merger............................... 17
Consideration by the Independent Committee........... 19
Interests of CVD's Officers and Directors in the
Merger.............................................. 19
Fairness Opinion..................................... 20
THE MERGER AGREEMENT...................................... 24
Accounting Treatment of Transaction.................. 29
Certain Income Tax Consequences...................... 30
Federal Securities Law Consequences; Registration
Right; Lock-up...................................... 30
NASDAQ National Market Listing....................... 30
Appraisal or Dissenters' Rights...................... 30
Regulatory Approval.................................. 30
PRICE RANGE OF COMMON STOCK AND DIVIDEND HISTORY.......... 31
BUSINESS OF RADIANCE...................................... 32
BUSINESS OF CVD........................................... 38
SELECTED HISTORICAL AND PRO FORMA FINANCIAL INFORMATION... 48
CVD MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.......... 53
RADIANCE MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.................... 59
SECURITY OWNERSHIP OF OFFICERS, DIRECTORS AND PRINCIPAL
STOCKHOLDERS........................................... 60
VOTE REQUIRED; INDEPENDENT COMMITTEE'S RECOMMENDATION..... 62
PROPOSAL 2: TO APPROVE AMENDMENT TO THE AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION TO CHANGE THE NAME OF CVD.... 62
PROPOSAL 3: TO APPROVE AMENDMENT TO THE 1996 STOCK
OPTION/STOCK ISSUANCE PLAN OF CVD......................... 63
STOCK ISSUANCE PROGRAM.................................... 65
AUTOMATIC OPTION GRANT PROGRAM............................ 65
GENERAL PROVISIONS........................................ 66
SUMMARY OF FEDERAL INCOME TAX CONSEQUENCES................ 67
EXECUTIVE COMPENSATION AND RELATED INFORMATION............ 70
STOCKHOLDER APPROVAL...................................... 77
DEADLINE FOR RECEIPT OF STOCKHOLDER PROPOSALS FOR 1999
ANNUAL MEETING............................................ 77
INDEPENDENT AUDITORS........................................ 78
OTHER MATTERS............................................... 78
FINANCIAL STATEMENTS........................................ F-1
ANNEX 1 -- AGREEMENT AND PLAN OF MERGER..................... I-1
ANNEX 2 -- FAIRNESS OPINION................................. II-2
</TABLE>
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SUMMARY
This summary highlights selected information from this document and may not
contain all of the information that is important to you. To understand the
proposals fully and for a more complete description of the legal terms of the
issuance of CVD Common Stock and related Merger, you should read this entire
document and the documents we have referred you to carefully.
THE COMPANIES
CARDIOVASCULAR DYNAMICS
CVD designs, develops, manufactures and markets catheters and coronary
stent systems used to treat certain vascular diseases. CVD's catheters are used
in conjunction with angioplasty and vascular stenting. CVD's proprietary Focus
catheter technology enables physicians to deliver therapeutic radial force and
stents, accurately and effectively to the treatment site. CVD's proprietary
stent designs offer characteristics enabling physicians to access varying
coronary anatomy. CVD believes that these products enable physicians to perform
challenging interventional procedures effectively, resulting in improved
treatment outcomes and lower costs. CVD owns the rights to 27 issued U.S.
patents, one issued European patent and two Japanese patents covering certain
aspects of its catheter, vascular access and SEAL stent technologies.
CVD has utilized its core proprietary technologies to develop products that
treat primary coronary disease and restenosis (reclosure of a previously treated
vessel). CVD's patented Focus 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 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
restenosis. CVD believes that the Focus technology may enable physicians to
treat vascular diseases cost-effectively by reducing the cost of those
procedures which require more than one catheter.
CVD'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. Although some of CVD's products are sold in the United States
the bulk of CVD's sales are in international markets, principally Europe and
Japan. However, certain of CVD's products are not available in each market due
to regulatory and intellectual property restrictions. CVD currently sells its
products through a combination of strategic partners, medical device
distributors and eleven direct sales personnel. Outside the United States, CVD's
sales organization consists of four people who manage a network of 19
distributors.
In June 1998, CVD entered into a technology license agreement with Guidant
Corporation, an international interventional cardiology products company,
granting Guidant rights to manufacture and distribute products using CVD's Focus
technology for delivery of stents, including exclusive rights in the United
States. In exchange for those rights, CVD has received, and will receive,
certain milestone payments based upon the transfer of the technological
knowledge to Guidant, and royalty payments based upon the sale of products by
Guidant using Focus technology.
CVD also has developed and markets products allowing physicians easier
access to the body's vascular system for guidewire and catheter entry. In
October 1998, CVD entered into a letter of intent with Escalon Medical Corp. for
the sale to Escalon of CVD's vascular access business.
RADIANCE MEDICAL SYSTEMS
Radiance is a research and development stage company in the field of
Radiotherapy (radiation therapy) for the treatment of cardiovascular disease.
Radiance is focused on researching technology to develop proprietary devices for
the prevention of restenosis, the recurrence of atherosclerotic blockages
following the
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interventional treatment of atherosclerosis. Radiance's primary product is a
catheter-based delivery system to deliver radioactive materials to the area of
an artery that has been treated with conventional interventional therapy such as
Percutaneous Transluminal Coronary Angioplasty ("PTCA"), atherectomy and/or
stent deployment.
Radiance believes that it has catheter and radiation source technology that
can deliver radioactive materials to the localized site safely and effectively.
Radiance's technology enables solid form radioactive material, of virtually any
isotope to be integrated into the wall of the balloon material itself, which
creates a balloon/source angioplasty catheter. The Radiance approach combines
the demonstrated benefits of Beta radiation with the utility of direct vessel
wall apposition associated with balloon dilatation.
Radiance currently is focusing on the development of the RMS Radiation
Delivery Balloon Catheter System (the "RDX Catheter"). The RDX Catheter consists
of an expandable dual balloon system which enables the radiation dosage to be
delivered precisely to the vessel wall. Since the balloon is in contact with the
wall, this method of delivering Radiotherapy is appropriate for vessels of any
diameter with proper balloon size selection. The catheter design incorporates a
beta emitting source in a solid, fully encapsulated configuration within the
walls of a balloon angioplasty catheter. This design provides the physician with
a familiar format which does not differ from conventional procedural techniques
used in everyday interventional practice.
OUR REASONS FOR THE ISSUANCE OF STOCK AND THE RELATED MERGER
ORIGINAL FORMATION OF RADIANCE BY CVD
In 1996, CVD developed a multilayered angioplasty balloon which had several
uses, including the delivery of radiation. CVD believed that by 1997 there was a
growing consensus within the interventional cardiology industry that radiation
could be used as a possible treatment of restenosis. In order to develop this
technology, CVD incorporated Radiance (then known as Radiis, Inc.) as a separate
corporation in August 1997. On September 4, 1997, CVD licensed to Radiance
certain angioplasty technology to be used by Radiance in conjunction with its
development, manufacturing and commercialization of products for the delivery of
radiation therapy to the body to treat restenosis. Under the terms of the
agreement, Radiance is obligated to pay CVD royalties based upon sales of
licensed products, subject to a minimum payment of $10,000 per year for the two
years following March 1998, and an overall minimum royalty of $500,000 from
inception of the agreement to January 1, 2005, in order to maintain its
exclusive license. In connection with the license agreement, Radiance granted to
CVD rights of first offer with respect to the commercialization of Radiance's
products. In consideration for the grant of the license, Radiance issued to CVD
750,000 shares of Series B Preferred Stock and a Warrant to purchase an
additional 1,500,000 shares of Series B Preferred Stock at a purchase price
equal to the lower of (i) $2.05 per share or (ii) one and one half times the per
share price of Radiance stock sold in its then most recent equity financing. The
Warrant was subsequently exercised in September 1998 for $.975 per share. As a
result, CVD currently owns approximately 50% of the outstanding equity of
Radiance.
On September 8, 1997, Radiance closed a private placement of 2,325,930
shares of Series A Preferred Stock sold to 25 investors at a price of $.65 per
share. In that private placement, CVD purchased 192,308 shares of Series A
Preferred Stock. In addition, Michael Henson, Chairman of the Board, and at that
time, Chief Executive Officer, of CVD, purchased 15,500 shares, and William
Gerard Von Hoffman, a director of CVD, purchased 16,000 shares, of Series A
Preferred Stock.
CVD originally formed Radiance as a separate entity that would focus on the
development of the Radiance technology and obtain financing of such development
from sources other than CVD. In order to finance Radiance and the development of
its technology at a minimum cost to CVD, Radiance sold stock to private
investors, some of whom were officers and directors of CVD. See the discussion
below in this Proposal No. 1, "THE MERGER AGREEMENT -- Interests Of CVD's
Officers And Directors In The Merger." At the time of the Radiance Formation in
August 1997, CVD's research and development efforts were focused on various
other technologies, including the innovative and proprietary SEAL technology
(Self Expanding Arterial Liner), Focus catheters for angioplasty and stent
deployment, vascular access devices and solution
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delivery and perfusion catheters. CVD's Board and management determined it would
be in the best interests of CVD to focus its efforts on fewer projects to better
utilize its technical and financial resources. CVD intended to undertake and
invest in at least two extensive clinical trials to prove the clinical efficacy
of the SEAL technology.
In addition, at that time, there were no definitive clinical trials
indicating positive results of treating and preventing restenosis with
radiation. CVD believed that there could be significant losses over a long
period of time because of the uncertainties and difficulties in developing and
bringing to market a viable product based on such technology. By forming a
separate entity to focus on treating and preventing restenosis with radiation
therapy, CVD could direct its efforts to fewer projects with potentially earlier
profitability and could avoid significant losses and expenditures on continued
research and development in the emerging field of radiation therapy. CVD
believed that this strategy would allow it, and its stockholders, to benefit
from the successful development of radiation technology through its ownership
and licensing arrangements with Radiance, while at the same time minimizing
CVD's exposure to any failure to develop the technology and the resulting
negative financial impact.
Following the commencement of Radiance's development operations in
September 1997, CVD agreed to provide to Radiance certain management services
relating to research and development, regulatory, manufacturing, and marketing.
CVD was reimbursed by Radiance for its costs of providing these services. In
addition, Radiance subleased from CVD office and laboratory space at a market
rate.
DEVELOPMENTS SINCE THE RADIANCE FORMATION
In late 1997 and through 1998 CVD continued to develop its SEAL (Self
Expanding Arterial Liner) stent technology, a new concept in vascular stenting
which is designed to treat restenosis by isolating the diseased segment of the
vessel wall from blood flow. The development of the SEAL technology, while still
promising, has not progressed as anticipated, for several reasons. First, the
market for CVD's first generation SEAL product has shrunk from all peripheral
and coronary vessels to a market that includes only large diameter coronary
arteries and saphenous vein grafts. Second, there are now over 50 different
types of conventional stents available from approximately 17 different stent
companies. Although CVD believes that the SEAL technology will prove to have a
lower restenosis rate due to its unique ability to line a high percentage of the
vessel wall, CVD believes conventional stents are now viewed as commodity
products. In addition, in 1998, CVD licensed certain rights to its Focus
technology for stent deployment to Guidant Corporation and determined to sell
the vascular access product line.
Radiance, on the other hand, has developed its product, the unique beta
emitting balloon catheter, faster than anticipated. In-vitro (bench top) testing
has (i) established depth and dosing profiles for in-vivo applications and (ii)
proven that a radioactive catheter with uniform isotope distribution on the
source can be produced. Feasibility animal studies in a pig model, conducted at
Stanford University and the University of Texas, San Antonio, demonstrated: (i)
that the device and radioactive source can be delivered to a target site in
coronary arteries; (ii) the RDX Radiation Delivery Catheter can safely deliver
the source to the target; and (iii) the delivery of radiation in a coronary
artery does not create unexpected damage or result in complications. The
combination of current bench top in-vivo testing and available clinical data
from ongoing clinical trials in radiation therapy, appear to indicate that
Radiance may be able to provide a safe and effective way to deliver vascular
radiation.
FACTORS BEHIND THE MERGER PROPOSAL
CVD originally developed and is familiar with the basic technology of
Radiance. In addition, CVD believes that its products and technology are
complementary to the technology being developed by Radiance. CVD currently
manufactures similar balloon catheters and has the core competency to
manufacture the Radiance product. As a result, the Board of Directors of CVD
believed that it would be prudent to consider acquiring ownership of all of
Radiance and appointed an Independent Committee of the Board of Directors to
analyze the opportunity further.
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CVD believes it can integrate the Radiance technology with its advanced
stent technology to create new products in a cost effective manner. CVD believes
that the SEAL technology, which is designed to line a high percentage of a
diseased vessel wall may prove to be a more effective form of radiation coated
stent. CVD is committed to providing advanced delivery systems to treat
restenosis, while Radiance is a pioneer in the development of the beta emitting
balloon catheter. CVD believes that the complementary nature of the two
companies' technology and CVD's familiarity with Radiance will create synergies
and result in greater growth potential for the combined companies.
Prior to this Merger proposal, Radiance intended to raise additional funds
through a second round of financing. In order to maintain its percentage
ownership of Radiance, CVD would have had to purchase additional shares of
Radiance capital stock in the second round of financing.
Therefore, CVD decided that it would be in the best interests of CVD and
its stockholders to reacquire Radiance through the Merger.
RECOMMENDATION OF INDEPENDENT PARTIES
Because of the interest that some members of the Board of Directors of CVD
have in Radiance, the Board appointed a committee of independent directors
composed of William G. Davis, Franklin D. Brown and Edward M. Leonard the
("Independent Committee") to review and approve the Merger. The Independent
Committee conducted its own analysis and considered numerous factors in reaching
its decision to recommend the Merger to the Board of Directors, including the
factors outlined above. In addition, the Independent Committee considered the
fairness opinion of Wedbush Morgan Securities dated November 3, 1998 (the
"Fairness Opinion"). The Fairness Opinion stated that subject to various
matters, the consideration proposed to be paid by CVD for Radiance in the Merger
was fair to the stockholders of CVD from a financial point of view.
The Fairness Opinion is included in this Proxy Statement as Annex II, and
you are urged to read it in its entirety.
INTERESTS OF CVD'S OFFICERS AND DIRECTORS IN THE MERGER
All members of CVD's Board of Directors and all officers of CVD own CVD
Common Stock, are owners of CVD Common Stock and/or hold stock options and, to
that extent, their interest in the Merger is the same as yours. However, as set
forth below, some of the officers and directors of CVD have interests in the
Merger that are different from your interests as a stockholder. The Independent
Committee considered these interests in recommending and approving the Merger.
- Michael R. Henson, Chairman of the Board of CVD, also is Chairman of the
Board and Chief Executive Officer of Radiance and owns 300,000 shares of
Radiance Common Stock, acquired in June 1998 for $0.065 per share. Mr.
Henson agreed not to take a salary from Radiance from June 1, 1998 to May
31, 1999. Mr. Henson also owns 15,500 shares of Radiance Series A
Preferred Stock, and options to purchase 135,000 shares of Radiance
Common Stock, and his wife owns options to purchase an additional 40,000
shares of Radiance Common Stock. In December 1998, Jeffrey O'Donnell
resigned as Chief Executive Officer of CVD for family reasons, to be
effective shortly after the special meeting of the stockholders. Mr.
O'Donnell will remain as a director of CVD. The Board of Directors has
elected Mr. Henson to serve as Chief Executive Officer commencing on the
effectiveness of Mr. O'Donnell's resignation. Mr. Henson has indicated
that if the Merger does not take place he will serve as Chief Executive
Officer of CVD and resign as Chief Executive Officer of Radiance. As
Chief Executive Officer of CVD, Mr. Henson will be responsible for
managing CVD's activities, and therefore will be in a position to
influence the ability of Radiance to achieve the milestones. Timely
achievement of the milestones will result in additional payments to
former Radiance stockholders and optionholders, including Mr. Henson.
- Gerard von Hoffmann, a director of CVD, owns 16,000 shares of Radiance
Series A Preferred Stock and options to purchase 20,000 shares of
Radiance Common Stock.
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- Certain officers of CVD also have options to purchase Common Stock of
Radiance, and thus will be entitled to a portion of the merger
consideration in the same manner as other optionholders of Radiance.
Jeffrey O'Donnell, Chief Executive Officer and President of CVD, Jeffrey
Thiel, Vice President -- Manufacturing and Operations and Claire Walker,
Vice President -- Clinical Affairs, each have options to purchase 5,000
shares of Radiance Common Stock. These options were granted by the Board
of Directors of Radiance in exchange for providing certain management
services relating to research and development, regulatory, manufacturing
and marketing.
- As stockholders and optionholders of Radiance these directors and
officers will receive the same Merger Consideration as other stockholders
and optionholders of Radiance.
- In addition to the ownership of the capital stock of Radiance by certain
officers and directors of CVD, several individuals also serve dual
functions on behalf of both companies. Michael Henson, the Chief
Executive Officer of CVD until June 1998, is the Chief Executive Officer
of Radiance, and serves as the Chairman of the Board of Directors of both
companies. In addition, Jeffrey O'Donnell, the Chief Executive Officer
and President of CVD, and a director of CVD, is also a member of the
Board of Directors of Radiance. Stephen Kroll is the Chief Financial
Officer and Secretary of both CVD and Radiance.
You are urged to read this Proxy Statement in its entirety for a more
complete description of the interests of the officers and directors of CVD in
the Merger. See the discussion under Proposal No. 1, "THE MERGER
AGREEMENT -- Interests of CVD's Officers and Directors."
THE MERGER
The Merger Agreement is attached as Annex I to this Proxy Statement. We
encourage you to read the Merger Agreement because it is the legal document that
governs the Merger.
MERGER CONSIDERATION (SEE PAGE 24)
Primary Consideration
If the Merger is completed, CVD will pay the stockholders of Radiance the
primary consideration of $3.00 for each share of Radiance Preferred Stock and
$2.00 for each share of Radiance Common Stock. In addition, Radiance
stockholders and optionholders may receive milestone payments of up to $2.00 for
each share of Series A Preferred Stock and $3.00 for each share of Common Stock
(or underlying options) owned based on the occurrence of milestone events
leading to regulatory approval, and an additional adjusted payment upon the
registration of the CVD Common Stock with the SEC. The total amount to be paid
to all holders of Radiance capital stock at closing will be approximately $7.0
million. Assuming all product development milestones are met on scheduled dates,
and there is no adjustment upon registration of the CVD Common Stock with the
SEC, an additional amount of approximately $6.9 million will be paid to Radiance
stockholders and optionholders. Holders of Radiance Common Stock and
optionholders will receive CVD Common Stock as payment for their shares and
options. Holders of Radiance Series A Preferred Stock will receive CVD Common
Stock and, at CVD's option, under certain circumstances, may receive up to 30%
of the aggregate consideration in cash. There are 2,133,622 shares of Preferred
Stock of Radiance (excluding shares currently owned by CVD) and 315,000 shares
of Common Stock of Radiance outstanding. The exact number of shares of CVD
Common Stock issued will depend on the value of CVD Common Stock at the Closing
of the Merger.
Options for 550,000 shares of Radiance Common Stock will accelerate and
vest immediately prior to the completion of the Merger. If the options are
exercised prior to completion of the Merger, the holders of the underlying
Radiance Common Stock will receive the same consideration for their shares as
other holders of Radiance Common Stock. If not exercised prior to completion of
the Merger, CVD shall assume each option which shall then be exercisable by its
holder and be converted into an option at the same exercise price, to purchase a
number of shares of CVD Common Stock equal to $2.00, based on the average of the
closing prices of CVD Common Stock as reported on the Nasdaq for the twenty
trading days ending on the trading
8
<PAGE> 13
day preceding the Closing (the "Average Closing Price"). Holders of options will
also receive the milestone payments for each share of Radiance Common Stock to
which they were entitled, whether or not they exercise those options.
Milestone Payments
The milestones represent important steps in the United States Food and Drug
Administration and European approval processes which CVD has determined are
critical in bringing the Radiance technology to the marketplace. The four
milestones consist of: (i) FDA approval of an Investigational Device Exemption
application for the initiation of human clinical trial; (ii) approval of the CE
mark for European marketing; (iii) the acceptance by the FDA of a Pre-Market
Approval ("PMA") application filing in the United States; and (iv) PMA approval
in the United States.
The amount of each milestone payment that stockholders receive for their
shares depends on the date that each milestone is achieved. If all of the
milestones are reached on the target dates, CVD will pay the former stockholders
and optionholders of Radiance an additional $3.00 for each share of Common Stock
and $2.00 for each share of Preferred Stock. In addition, for each 30 day period
that a milestone is reached ahead of the target date, Radiance stockholders and
optionholders will receive an additional 10% of that milestone payment, up to a
maximum of 30%. However, for each 30 day period behind the target date the
milestone payment will be reduced 10%. Radiance stockholders will not receive
any milestone payments if a milestone is not reached within 120 days of the
target date.
Adjusted Additional Consideration
CVD will file a registration statement with the SEC covering the resale of
the shares of CVD Common Stock issued to Radiance stockholders in the Merger
within five days of completion of the Merger. In addition to the Primary
Consideration and any possible Milestone Payment, if such registration statement
is not effective within 30 days of the closing of the Merger, and on the date
before such registration is effective, the price of CVD Common Stock is less
than the Average Closing Price, CVD will pay former Radiance stockholders the
difference between the price of the CVD Common Stock on the day before the
Common Stock is registered and the Average Closing Price. Such difference would
be paid in CVD Common Stock and could result in additional dilution to the
existing CVD stockholders.
FORM OF CONSIDERATION (SEE PAGE 26)
CVD will pay the Merger Consideration to the holders of Radiance Common
Stock in the form of CVD Common Stock. CVD may pay the Merger Consideration to
the holders of Radiance Preferred Stock in the form of CVD Common Stock or, at
CVD's option, it may pay an amount up to 30% of the Merger Consideration in the
form of cash. The exact number of shares of CVD Common Stock to be issued will
depend on the value of CVD Common Stock at the time of each issuance. Payment of
the Merger Consideration by CVD will result in significant dilution to CVD
stockholders.
If the holders of Radiance Preferred Stock request more cash than the
amount set aside by CVD, stockholders electing to receive cash will receive a
lower proportion of cash and more stock, based on the number of stockholders who
elect to receive cash. If the holders of Radiance Series A Preferred Stock
request less cash than CVD has set aside, stockholders electing to receive stock
will receive a greater proportion of cash and less stock, based on the number of
stockholders who elect to receive stock.
ADDITIONAL AGREEMENTS RELATED TO THE MERGER (SEE PAGE 27)
The merger agreement contains additional agreements between CVD and
Radiance which are related to the Merger and must be fulfilled by both parties.
For example, CVD has agreed to appoint Maurice Buchbinder, M.D., the Medical
Director of CVD for a period of four years on a consulting basis, and a position
which entitles Dr. Buchbinder to receive stock options. Dr. Buchbinder is a
cardiologist and the largest stockholder in Radiance (other than CVD) and holds
769,230 shares of Series A Preferred Stock of Radiance and options to purchase
160,000 shares of Common Stock of Radiance. CVD also has agreed to
9
<PAGE> 14
appoint a radiation management committee, to be composed initially of Michael
Henson, Jeffrey O'Donnell and Dr. Buchbinder. The radiation management committee
will oversee the operations of CVD with respect to the development of radiation
therapy products. CVD has agreed to spend at least $10,000,000 on research and
the development of radiation therapy products during the two years following the
completion of the Merger. CVD has agreed that a majority of such spending will
be directed toward matters included in the milestones, but is subject to the
business judgment of the Board of Directors of CVD. Finally, CVD has agreed to
indemnify all of the directors and officers of Radiance against any liability or
losses which any of them may incur from any lawsuit or other action brought by
stockholders of Radiance as a result of the Merger, or any of the transactions
contemplated by the Merger Agreement.
In addition to the agreements outlined above, as a condition to the
completion of the Merger, CVD will enter into Employment Agreements for terms of
two years with each of Michael Henson and Brett Trauthen, a key employee of
Radiance. As an additional condition, prior to the completion of the Merger,
each of Mr. Trauthen, Dr. Buchbinder and Mr. Henson will be required to enter
into Noncompetition Agreements.
TERMINATION OF THE MERGER AGREEMENT (SEE PAGE 29)
CVD has the right to terminate the Merger if the Average Closing Price is
$1.50 or less. In addition, the Merger can be terminated by either of Radiance
or CVD in the event of certain governmental or regulatory actions, in the event
of a material breach of the Merger Agreement, or if the Merger is not completed
by February 1, 1999, but CVD may extend such date to April 30, 1999 by loaning
Radiance $1 million in exchange for a promissory note which is convertible at
CVD's option into Radiance equity securities in the next round of Radiance
equity financing. The Merger Agreement also can be terminated by the mutual
written consent of each of CVD and Radiance.
EXPENSES (SEE PAGE 29)
If the Merger is not completed because one party cannot obtain the consent
of its stockholders, that party will pay the costs of the other party incurred
in connection with the Merger, up to a maximum of $30,000. On December 15, 1998,
the stockholders of Radiance approved the Merger. Otherwise, the Merger
Agreement provides that all costs and expenses incurred in connection with the
Merger Agreement and the transactions contemplated thereby, whether consummated
or not, will be paid by the party incurring such cost or expense.
FEDERAL INCOME TAX CONSEQUENCES
CVD intends the Merger to be tax free to CVD and the stockholders of CVD.
CVD and Radiance intend that the Merger be treated as a reorganization under
Section 368(a)(1)(A) and Section 368(a)(2)(D) of the Internal Revenue Code of
1986.
10
<PAGE> 15
COMPARATIVE PER SHARE DATA (UNAUDITED)
The following table sets forth certain historical per share data of CVD and
combined per share data of CVD and Radiance on an unaudited pro forma basis. CVD
has never paid cash dividends. You should read the information set forth below
along with the selected historical financial data and the unaudited pro forma
combined condensed financial information included elsewhere in the joint proxy
statement /prospectus. The pro forma combined condensed financial data are not
necessarily indicative of the operating results that would have been achieved
had the Merger been consummated as of the beginning of the periods presented and
you should not construe it as representative of future operations.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------- ------------------
1995 1996 1997 1997 1998
------ ------ ------ ------- -------
<S> <C> <C> <C> <C> <C>
Historical CVD:
Net loss per basic and diluted share........ $(0.71) $(0.69) $(0.96) $(0.36) $(0.59)
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------ -----------------
<S> <C> <C>
Pro forma combined diluted net loss(1):
Per CVD share............................................. $(0.95) $(0.54)
Equivalent per Radiance share............................. $(0.07) $(0.11)
</TABLE>
<TABLE>
<CAPTION>
AS OF
SEPTEMBER 30, 1998
------------------
<S> <C>
Book value per share(2):
Historical CVD............................................ $3.34
Historical Radiance....................................... $1.00
Pro forma combined per CVD share(3)....................... $3.17
Pro forma combined per Radiance share(3).................. $0.10
</TABLE>
- ---------------
(1) The Radiance equivalent pro forma combined diluted net income per share
amounts are calculated by multiplying the CVD combined pro forma diluted net
income per share amounts by the exchange ratio of CVD Common Stock received
for Radiance Stock exchanged of 0.60 for Radiance Common Stock and options
and 0.90 for Radiance Preferred Stock. The exchange ratio is based on the
assumption that merger consideration is paid on a $3.33 CVD Common Stock
price. There can be no assurance, however, that the actual CVD common stock
price used to compute the exchange ratio will not be different.
(2) The CVD historical book value per share is computed by dividing
stockholders' equity by the number of share of Common Stock outstanding at
September 30, 1998. The Radiance historical book value per share is computed
by dividing shareholder's equity by the number of shares of Common Stock
outstanding at September 30, 1998, after reducing shareholder's equity by
the convertible preferred shares liquidation preference of $0.65 per share.
The pro forma combined book value per share is computed by dividing pro
forma stockholders' equity by the pro forma number of shares of Common Stock
outstanding as of September 30, 1998.
(3) CVD estimates it will incur direct transaction costs of approximately $0.4
million associated with the merger, which will be included as part of the
purchase price to be allocated to the Radiance assets acquired. The pro
forma combined book value per share data gives effect to the estimated
direct transaction costs as if such costs had been incurred as of the
respective balance sheet date. The pro forma combined book value per share
data does not include additional cots which costs are not currently
estimable, expected to be incurred relating to integrating the companies.
The direct transaction costs are not included in the pro forma combined net
income per share data. See "Unaudited Pro Forma Condensed Combined Selected
Financial Statements" and accompanying notes thereto.
11
<PAGE> 16
NAME CHANGE FROM CVD TO RADIANCE
CVD proposes to approve and adopt an amendment to the Certificate of
Incorporation of CVD to change its name from CardioVascular Dynamics, Inc. to
Radiance Medical Systems, Inc., which the Board of Directors believes will
better describe operations after the Merger.
AMENDMENT OF OPTION PLAN
CVD proposes to amend its 1996 Stock Option/Stock Issuance Plan (the
"Option Plan") to increase the number of shares of Common Stock authorized for
issuance under the Option Plan by an additional 750,000 shares of Common Stock
in order to provide equity incentives to former employees of Radiance who will
become employees of CVD upon completion of the Merger. The Board of Directors
believes that by providing equity incentives to employees, CVD is better able to
attract, retain and motivate those employees. You are urged to read Proposal No.
3 for a more complete description of the amendment and the principal features of
the Option Plan.
OUR RECOMMENDATIONS TO STOCKHOLDERS
The Independent Committee has unanimously approved the issuance of Common
Stock and the Merger and recommends that you vote in favor of the issuance and
the Merger. Both the Board of Directors of CVD and the Independent Committee
unanimously have approved the name change from CVD to Radiance and the amendment
to the Option Plan, and recommend that you vote in favor of those proposals.
12
<PAGE> 17
INFORMATION CONCERNING SOLICITATION AND VOTING
DATE, TIME AND PLACE OF SPECIAL MEETING
The special meeting of the stockholders of CardioVascular Dynamics, Inc.
("CVD" or the "Company") will be held on January 14, 1999 at 10:00 a.m., local
time, at 13700 Alton Parkway, Suite 160, Irvine, California (the "Special
Meeting").
On the Record Date, December 11, 1998, 8,891,941 shares of CVD Common Stock
were outstanding and entitled to vote. As of December 11, 1998, stockholders who
are not affiliates of CVD owned approximately 6,919,753 shares, or 78%, of the
outstanding shares of CVD Common Stock. Radiance owns no shares of CVD's Common
Stock. The directors and officers of CVD and their affiliates together own
approximately 1,972,188 shares, or 22% of the Common Stock.
PURPOSE OF THE SPECIAL MEETING
At the Special Meeting, stockholders of record of CVD as of the close of
business on December 11, 1998 (the "Record Date") will be asked to consider and
vote upon (i) a proposal to approve the issuance of shares of CVD Common Stock
(the "Issuance") in exchange for the outstanding capital stock of Radiance in
the related Merger of Radiance with and into a subsidiary of CVD (the "Merger"),
pursuant to an Agreement and Plan of Merger by and among CVD, CVD/RMS
Acquisition Corp., a wholly-owned subsidiary of CVD, and Radiance, dated as of
November 3, 1998 (the "Merger Agreement"); (ii) a proposal to approve and adopt
an amendment to the Certificate of Incorporation of CVD to change the name of
CVD from CardioVascular Dynamics, Inc. to Radiance Medical Systems, Inc. (the
"Name Change"); (iii) a proposal to approve and adopt an amendment to CVD's 1996
Stock Option/Stock Issuance Plan to increase the number of shares available for
issuance by an additional 750,000 shares of Common Stock (the "Option Plan
Amendment"); and (iv) such other matters as may properly be brought before the
Special Meeting.
RECORD DATE; SHARES OUTSTANDING AND ENTITLED TO VOTE; QUORUM
Only holders of record of CVD's Common Stock (the "Common Stock") at the
close of business on the Record Date are entitled to notice of and to vote at
the Special Meeting. As of the close of business on the Record Date, there were
8,891,941 shares of Common Stock outstanding and entitled to vote, held of
record by approximately 276 stockholders. A majority, or 4,445,971 of these
shares, present in person or represented by proxy, will constitute a quorum for
the transaction of business. Each stockholder is entitled to one vote for each
share of Common Stock held as of the Record Date. Abstentions and broker
non-votes will be counted as present and voting for the purposes of determining
whether there is a quorum at the Special Meeting.
VOTE REQUIRED
Issuance and Merger. CVD values the advice and consent of its stockholders
and, is seeking their consent to the Issuance and the Merger. The rules of the
National Association of Securities Dealers ("NASD"), the governing body of the
Nasdaq exchange on which shares of CVD are traded, require the affirmative vote
of the holders of a majority of the shares of CVD's Common Stock represented at
the Special Meeting and voting on the proposal. Abstentions will have the same
effect as votes against the Issuance, and broker non-votes will have no effect.
Name Change. CVD seeks its stockholders' consent to the Name Change.
Pursuant the Delaware General Corporation Law ("Delaware Law"), the Name Change
requires the affirmative vote of a majority of all outstanding shares of the
capital stock of CVD. Abstentions and broker non-votes will have the same effect
as votes against the Name Change.
Option Plan Amendment. Finally, CVD seeks its stockholders' consent to
amend its Stock Option Plan. This vote, like the vote on the Issuance and
Merger, requires the affirmative vote of the holders of a majority of the shares
of CVD Common Stock represented and voting on the proposal at the Special
Meeting.
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<PAGE> 18
Abstentions will have the same effect as votes against the Option Plan
Amendment, and broker non-votes will have no effect.
VOTING OF PROXIES; REVOCABILITY OF PROXIES
The proxy accompanying this Proxy Statement is solicited on behalf of the
Board of Directors of CVD for use at the Special Meeting. Stockholders are
requested to complete, date and sign the accompanying proxy and promptly return
it in the accompanying envelope or otherwise mail it to CVD. All proxies that
are executed properly and received by CVD in time to be voted at the Special
Meeting, and that are not revoked, will cause the shares of Common Stock
represented thereby to be voted at the Special Meeting in accordance with the
instructions indicated on the proxies or, if no direction is indicated, FOR
approval of the Issuance in the related Merger; FOR approval of the Name Change;
and FOR approval of the Option Plan Amendment. Any stockholder who has given a
proxy may revoke it at any time before it is exercised at the Special Meeting by
(i) delivering to the Secretary of CVD (by any means, including facsimile) a
written notice, bearing a date later than the proxy, stating that the proxy is
revoked, addressed to CVD at 13700 Alton Parkway, Suite 160, Irvine, California
92618, facsimile number (949) 457-9561, (ii) signing and delivering a proxy
relating to the same shares and bearing a later date than the earlier proxy
prior to the vote at the Special Meeting or (iii) attending the Special Meeting
and voting in person (although attendance at the Special Meeting will not, by
itself, revoke a proxy). If a quorum is not obtained or if fewer shares of
Common Stock than the number required therefor are voted in favor of approval of
the Issuance, the Board of Directors expects to postpone or adjourn the Special
Meeting in order to permit additional time for soliciting and obtaining
additional proxies or votes, and at any subsequent reconvening of the Special
Meeting, all proxies will be voted in the same manner as such proxies would have
been voted at the original Special Meeting, except for any proxies which have
theretofore effectively been revoked or withdrawn.
SOLICITATION OF PROXIES AND EXPENSES
CVD will bear the cost of soliciting proxies from its stockholders. CVD has
retained the services of ChaseMellon Shareholder Services, L.L.C.
("ChaseMellon") to assist the solicitation of proxies. The estimated costs for
these services is $7,500. In addition, CVD has agreed to indemnify ChaseMellon
against any losses or liabilities arising out of ChaseMellon's fulfillment of
the contract, except for such losses or liabilities arising out of ChaseMellon's
own negligence or willful misconduct. In addition to solicitation by mail, the
directors, officers and employees of CVD may solicit proxies from stockholders
by telephone, telegram, letter, facsimile or in person. CVD's regular employees
will not receive additional compensation for such solicitation. Following the
original mailing of the proxies and other soliciting materials, CVD will request
brokers, custodians, nominees and other record holders to forward copies of the
proxy and other soliciting materials to persons for whom they hold shares of the
Common Stock and to request authority for the exercise of proxies. In such
cases, CVD, upon the request of the record holders, will reimburse such holders
for their reasonable expenses.
FORWARD-LOOKING STATEMENTS
CVD cautions stockholders that, in addition to the historical financial
information included herein, this Proxy Statement includes "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995 (the "Securities Reform Act") that are based on management's beliefs, as
well as on assumptions made by and information currently available to
management. All statements other than statements of historical fact included in
this offering memorandum, including without limitation, certain statements under
"Summary," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business" and located elsewhere herein regarding
CVD's financial position and business strategy, may constitute forward-looking
statements. In addition, forward-looking statements generally can be identified
by the use of forward-looking terminology such as "believes," "may," "will,"
"expects," "intends," "estimates," "anticipates," "plans," "seeks," or
"continues," or the negative thereof or variations thereon or similar
terminology. Such forward-looking statements involve known and unknown risks,
including, but not limited to, economic and market conditions, the regulatory
environment in which CVD operates, competitive
14
<PAGE> 19
activities or other business conditions. There can be no assurance that CVD's
actual results, performance or achievements will not differ materially from any
future results, performance or achievements expressed or implied from such
forward-looking statements. Important factors that could cause actual results to
differ materially from CVD's expectations ("Cautionary Statements") are
disclosed in this Proxy Statement, as well as in CVD's Annual Report on Form
10-K for the year ended December 31, 1997. All subsequent written and oral
forward-looking statements attributable to us or persons acting on our behalf
are expressly qualified in their entirety by these Cautionary Statements.
ADDITIONAL INFORMATION
CVD is subject to the informational requirements of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), and, in accordance therewith,
files reports, proxy statements and other information with the Securities and
Exchange Commission (the "SEC"). Such reports, proxy statements and other
information can be inspected and copied at the public reference facilities
maintained by the SEC at Room 1024, 450 Fifth Street, N.W., Washington, D.C.
20549 and at the SEC's regional offices at 7 World Trade Center, 13th Floor, New
York, New York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. Copies of these materials can also be obtained from the
SEC at prescribed rates by writing to the Public Reference Section of the SEC,
450 Fifth Street, N.W., Washington, D.C. 20549. The SEC maintains an Internet
web site that contains certain reports, proxy statements and other information
regarding issuers like CVD who file electronically with the SEC. The address of
that site is http://www.sec.gov. The reports, proxy statements and other
information filed by CVD with the SEC may also be inspected at the offices of
the National Association of Securities Dealers, Inc., NASDAQ Reports Section,
1735 K Street, Washington, D.C. 20006.
15
<PAGE> 20
PROPOSAL NO. 1
PROPOSAL TO APPROVE THE ISSUANCE OF
CVD COMMON STOCK AND THE RELATED MERGER
GENERAL
The Merger Agreement provides for Radiance to be merged with and into
CVD/RMS Acquisition Corp., a wholly-owned subsidiary of CVD (the "Sub"), with
the Sub as the surviving corporation (the "Surviving Corporation") in the
Merger. Upon filing of a Certificate of Merger with the Delaware Secretary of
State (the "Effective Time"), each share of the common stock, par value $0.001
per share, of Radiance (the "Radiance Common Stock") will be exchanged for $2.00
in common stock, par value $0.001 per share, of CVD (the "CVD Common Stock") and
each share of the Series A Preferred Stock, par value $0.001 per share, of
Radiance (the "Radiance Preferred Stock") not held by CVD or Sub will be
exchanged for $3.00 in CVD Common Stock, or at CVD's option, a certain amount of
CVD Common Stock and cash (the "Primary Consideration"). In addition, Radiance
stockholders may receive milestone payments of up to $2.00 in CVD Common Stock
for each share of Radiance Series A Preferred Stock and $3.00 in CVD Common
Stock for each share of Radiance Common Stock based on the occurrence of events
related to regulatory approval, and an additional adjusted payment upon
registration of the CVD Common Stock with the SEC. See the discussion below in
this Proposal No. 1, "THE MERGER AGREEMENT -- Merger Consideration."
The number of shares of CVD Common Stock issuable to Radiance stockholders
will range from approximately 1,579,000 shares, assuming (i) CVD elects to pay
30% of the consideration in cash, (ii) the Average Closing Price is $5.00, (iii)
there are no milestone payments and (iv) there is no adjustment upon
registration of the shares; to 4,874,000 shares, assuming (i) CVD pays the
entire consideration in stock, (ii) each milestone is achieved on the target
date, and the Average Price of CVD Common Stock at such time is $3.33 per share,
(iii) the Average Closing Price is $2.00 per share, and (iv) there is no
adjustment upon registration. This range represents approximately 16% to 51% of
the outstanding stock of CVD as of November 30, 1998. However, the number of
shares of CVD Common Stock issuable to Radiance stockholders could be
significantly greater if the Average Closing Price is less than $2.00, or if
upon payment of the milestones, the price of CVD Common Stock is less than $3.33
per share. If that happens, CVD will be required to issue more shares of stock
to pay the same amount of milestone value. Similarly, the number of shares of
CVD Common Stock issuable if there is an adjustment upon registration cannot be
calculated until the registration of such shares, but will depend if and to what
extent the price of CVD Common Stock decreases after the Closing of the Merger.
See the discussion below in this Proposal No. 1, "THE MERGER AGREEMENT -- Merger
Consideration."
The terms of the Agreement and Plan of Merger may be amended or waived by
the parties thereto. See the discussion below in this Proposal No. 1, "THE
MERGER AGREEMENT -- Termination; Amendment; Expenses."
BACKGROUND OF THE MERGER
In 1996, CVD developed a multilayered angioplasty balloon which had several
uses, including the delivery of radiation. By 1997 competitors had begun to
investigate radiation as a possible treatment of restenosis in order to develop
this technology, CVD incorporated Radiance (then known as Radiis, Inc.) as a
separate corporation in August 1997. On September 4, 1997, CVD licensed to
Radiance certain angioplasty technology to be used by Radiance in conjunction
with its development, manufacture and commercialization of products for the
delivery of radiation therapy to the body to treat restenosis. This license
agreement requires Radiance to pay CVD royalties based upon sales of licensed
products, subject to a minimum payment of $10,000 per year for the two years
following March 1998, and an overall minimum royalty of $500,000 from
16
<PAGE> 21
inception of the agreement to January 1, 2005, in order to maintain its
exclusive license. In connection with the license agreement, Radiance granted to
CVD rights of first offer with respect to the commercialization of Radiance's
products. In consideration for the grant of the license, Radiance issued to CVD
750,000 shares of Series B Preferred Stock and a Warrant to purchase an
additional 1,500,000 shares of Series B Preferred Stock at a purchase price
equal to the lower of (i) $2.05 per share or (ii) one and one half times the per
share price of Radiance stock sold in its then most recent equity financing.
On September 8, 1997, Radiance closed a private placement of 2,325,930
shares of Series A Preferred Stock sold to 22 investors (including CVD) at a
price of $.65 per share. In that private placement, CVD purchased 192,308 shares
of Series A Preferred Stock. In addition, Michael Henson, Chairman of the Board
of CVD, and, at that time, Chief Executive Officer of CVD, purchased 15,500
shares and Gerard von Hoffman, a director of CVD, purchased 16,000 shares. After
the private placement, CVD owned approximately 31% of the outstanding capital
stock of Radiance.
On September 10, 1998, CVD exercised its Warrant to purchase 1,500,000
shares of Series B Preferred Stock of Radiance at an exercise price of $.975 per
share (one and one half time the $.65 per share price in Radiance's most
recently completed financing). After exercise of the Warrant, CVD owned
approximately 50% of the outstanding capital stock of Radiance, and, Jeffrey
O'Donnell, Chief Executive Officer of CVD, was appointed to the Board of
Directors of Radiance. On September 23, 1998, CVD and Radiance executed a letter
of intent relating to the acquisition of all shares of Radiance by CVD. In
connection with the letter of intent, CVD paid Radiance $400,000 which was
returned to CVD upon execution of the Merger Agreement on November 3, 1998.
Following the commencement of Radiance's development operations in
September 1997, CVD agreed to provide to Radiance certain management services
relating to research and development, regulatory, manufacturing, and marketing.
In addition, the Board of Directors of Radiance granted certain CVD officers
options to purchase 5,000 shares of Radiance Common Stock in exchange for
providing Radiance such management services. See the discussion below in this
Proposal No. 1, "Interests of CVD's Officers and Directors in the Merger."
REASONS FOR THE MERGER
Reasons for Original Formation of Radiance
CVD originally formed Radiance as a separate entity that would focus on the
development of the Radiance technology and obtain the financing of such
development from sources other than CVD. In order to finance Radiance and the
development of its technology at a minimum cost to CVD, Radiance sold stock to
private investors, some of whom were officers and directors of CVD. See the
discussion below in this Proposal No. 1, "THE MERGER AGREEMENT -- Interests Of
CVD's Officers And Directors In The Merger." At the time of the Radiance
Formation in August 1997, CVD's research and development efforts were focused on
various other technologies, including the innovative and proprietary SEAL
technology (Self Expanding Arterial Liner), Focus catheters for angioplasty and
stent deployment, vascular access devices and solution delivery and perfusion
catheters. CVD's Board and management determined it would be in the best
interests of CVD to focus its efforts on fewer projects to better utilize its
technical and financial resources. CVD intended to undertake and invest in at
least two extensive clinical trials to prove the clinical efficacy of the SEAL
technology.
In addition, at that time, there were no definitive clinical trials
indicating positive results of treating and preventing restenosis with
radiation. CVD believed that there could be significant losses over a long
period of time because of the uncertainties and difficulties in developing and
bringing to market a viable product based on such technology. By forming a
separate entity to focus on treating and preventing restenosis with radiation
therapy, CVD could direct its efforts to fewer projects with potentially earlier
profitability and could avoid significant losses and expenditures on continued
research and development in the emerging field of radiation therapy. CVD
believed that this strategy would allow it, and its stockholders to benefit from
the successful development of radiation technology through its ownership and
licensing arrangements with Radiance, while
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at the same time it would minimize CVD's exposure to any failure to develop the
technology and the resulting negative financial impact.
Developments Since the Radiance Formation
The development of the SEAL technology, while still promising, has not
progressed as anticipated, for several reasons. First, the market for CVD's
first generation product has shrunk from all peripheral and coronary vessels to
a market that includes only large diameter coronary arteries and saphenous vein
grafts. Second, there are now over 50 different types of conventional stents
available from approximately 17 different stent companies. Although CVD believes
that the SEAL technology will prove to have a lower restenosis rate due to its
unique ability to line a high percentage of the vessel wall, CVD believes
conventional stents are now viewed as commodity products. In addition, in 1998,
CVD licensed certain rights to its Focus technology for stent deployment to
Guidant Corporation and determined to sell the vascular access product line.
Radiance, on the other hand, has developed its product, the unique beta
emitting balloon catheter, faster than anticipated. The Radiance RDX Radiation
Delivery Catheter is a novel approach to the application of radiation therapy to
coronary and peripheral vasculature from within the lumen of these blood
vessels. The catheter design incorporates a beta emitting source in a solid,
fully encapsulated configuration within the walls of a balloon angioplasty
catheter. This design provides the physician with a familiar format which does
not differ from conventional procedural techniques used in everyday
interventional practice.
In-vitro (bench top) testing has (i) established depth and dosing profiles
for in-vivo applications and (ii) proven that a radioactive catheter with
uniform isotope distribution on the source can be produced. Feasibility animal
studies in a pig model, conducted at Stanford University and the University of
Texas, San Antonio, demonstrated: (i) that the device and radioactive source can
be delivered to a target site in coronary arteries; (ii) the RDX Radiation
Delivery Catheter can safely deliver the source to the target; and (iii) the
delivery of radiation in a coronary artery does not create unexpected damage or
result in complications. The combination of current bench top in-vivo testing
and available clinical data from ongoing clinical trials in radiation therapy,
appear to indicate that Radiance may be able to provide a safe and effective way
to deliver vascular radiation.
Factors Behind the Merger Proposal
CVD originally developed and is familiar with the basic technology of
Radiance. In addition, CVD believes that its products and technology are
complementary to the technology being developed by Radiance. CVD currently
manufactures similar balloon catheters and has the core competency to
manufacture the Radiance product. As a result, the Board of Directors of CVD
believed that it would be prudent to consider acquiring ownership of all of
Radiance and appointed an Independent Committee of the Board of Directors to
analyze the opportunity further.
CVD believes it can integrate the Radiance technology with its advanced
stent technology to create new products in a cost effective manner. CVD believes
that the SEAL technology, which is designed to line a high percentage of a
diseased vessel wall may prove to be a more effective form of radiation coated
stent. CVD is committed to providing advanced delivery systems to treat
restenosis, while Radiance is a pioneer in the development of the beta emitting
balloon catheter. CVD believes that the complementary nature of the two
companies' technology and CVD's familiarity with Radiance will create synergies
and result in greater growth potential for the combined companies.
Prior to this Merger proposal, Radiance intended to raise additional funds
through a second round of financing. In order to maintain its percentage
ownership of Radiance, CVD would have had to purchase additional shares of
Radiance capital stock in the second round of financing. Finally, whether or not
CVD chose to participate in the second round of financing, any future exercise
of CVD's warrant to purchase 1,500,000 shares of Radiance would be more costly
to CVD. Instead of the price at which CVD exercised the warrant ($0.975 per
share), the price would have increased to one and one-half times the per share
price of Radiance stock sold in its most recent equity financing. Therefore, CVD
decided that it would be in the best interests of CVD and its stockholders to
reacquire Radiance through the Merger.
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CONSIDERATION BY THE INDEPENDENT COMMITTEE
The Independent Committee of directors composed of Franklin D. Brown,
William G. Davis and Edward M. Leonard believes that the terms of the Radiance
Acquisition are fair to, and in the best interests of, CVD and its stockholders.
The Independent Committee conducted its own analysis and considered numerous
factors in reaching its decision to recommend the Merger to the Board of
Directors, including the factors outlined above.
The Independent Committee also considered, among other things: (i)
information concerning the financial performance, condition, business operations
and prospects of each of CVD and Radiance; (ii) the structure of the Merger; and
(iii) the terms of the Merger Agreement and other documents to be executed in
connection with the Merger. In addition, the Independent Committee considered
the Fairness Opinion of Wedbush Morgan Securities dated November 3, 1998.
Accordingly, the Independent Committee has unanimously approved the Radiance
Acquisition, declared it advisable and recommended its approval by CVD's
stockholders. See the discussion below in this Proposal No. 1, "Fairness
Opinion." The Board of Directors believes the Radiance Merger presents a unique
opportunity for CVD to expand substantially its participation in the field of
advanced medical delivery systems.
INTERESTS OF CVD'S OFFICERS AND DIRECTORS IN THE MERGER
All members of CVD's Board of Directors and all officers of CVD own CVD
Common Stock, are affiliated with owners of CVD Common Stock and/or hold stock
options and, to that extent, their interest in the Merger is the same as yours.
However, as set forth below, some of the officers and directors of CVD have
interests in the Merger that are different from your interests as a stockholder.
The Independent Committee considered these interests in recommending and
approving the Merger.
- Michael R. Henson, Chairman of the Board of CVD, also is Chairman of the
Board and Chief Executive Officer of Radiance and owns 300,000 shares of
Radiance Common Stock, acquired in June 1998 for $0.065 per share. Mr.
Henson agreed not to take a salary from Radiance from June 1, 1998 to May
31, 1999. Mr. Henson also owns 15,500 shares of Radiance Series A
Preferred Stock, and options to purchase 135,000 shares of Radiance
Common Stock, and his wife owns options to purchase an additional 40,000
shares of Radiance Common Stock. In December 1998, Jeffrey O'Donnell
resigned as Chief Executive Officer of CVD for family reasons, to be
effective shortly after the special meeting of the stockholders. Mr.
O'Donnell will remain as a director of CVD. The Board of Directors has
elected Mr. Henson to serve as Chief Executive Officer commencing on the
effectiveness of Mr. O'Donnell's resignation. Mr. Henson has indicated
that if the Merger does not take place he will serve as Chief Executive
Officer of CVD and resign as Chief Executive Officer of Radiance. As
Chief Executive Officer of CVD, Mr. Henson will be responsible for
managing CVD's activities, and therefore will be in a position to
influence the ability of Radiance to achieve the milestones. Timely
achievement of the milestones will result in additional payments to
former Radiance stockholders and optionholders, including Mr. Henson.
- Gerard von Hoffmann, a director of CVD, owns 16,000 shares of Radiance
Series A Preferred Stock and options to purchase 20,000 shares of
Radiance Common Stock.
- Certain officers of CVD also have options to purchase Common Stock of
Radiance, and thus will be entitled to a portion of the Merger
Consideration in the same manner as other optionholders of Radiance.
Jeffrey O'Donnell, Chief Executive Officer and President of CVD, Jeffrey
Thiel, Vice President -- Manufacturing and Operations and Claire Walker,
Vice President -- Clinical Affairs, each have options to purchase 5,000
shares of Radiance Common Stock. These options were granted by the Board
of Directors of Radiance in exchange for providing certain management
services relating to research and development, regulatory, manufacturing
and marketing.
- As stockholders and optionholders of Radiance these directors and
officers will receive the same Merger consideration as other stockholders
and optionholders of Radiance.
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- In addition to the ownership of the capital stock of Radiance by certain
officers and directors of CVD, several individuals also serve dual
functions on behalf of both companies. Michael Henson, the Chief
Executive Officer of CVD until June 1998, is the Chief Executive Officer
of Radiance, and serves as the Chairman of the Board of Directors of both
companies. In addition, Jeffrey O'Donnell, the Chief Executive Officer
and President of CVD, is also a member of the Board of Directors of
Radiance. Stephen Kroll is the Chief Financial Officer and Secretary of
both CVD and Radiance.
All options have an exercise price of $0.065 per share and will accelerate
upon completion of the Merger, and to the extent not exercised at the Merger,
will be assumed and converted into CVD options to purchase $2.00 of CVD Common
Stock and the right to receive the Milestone Payments, whether or not the
options are exercised. See the discussion below in this Proposal No. 1, "THE
MERGER AGREEMENT -- Options."
WEDBUSH FAIRNESS OPINION
Pursuant to an engagement agreement dated September 10, 1998, Wedbush
Morgan Securities ("Wedbush") was retained by the Independent Committee of the
Board of Directors of CVD to render its opinion as to whether the Merger
Consideration proposed to be paid by CVD in the Merger is fair, from a financial
point of view, to the stockholders of CVD.
Wedbush made presentations to the Independent Committee of the Board of
Directors of CVD at meetings held on October 14, 1998, and November 2, 1998, and
rendered its oral opinion, which was subsequently confirmed in a written opinion
dated November 3, 1998, to the effect that, as of such date and subject to
various matters set forth in the opinion, the Merger Consideration proposed to
be paid by CVD in the Merger was fair to the stockholders of CVD from a
financial point of view. No limitations were imposed by the Independent
Committee or the Board on Wedbush with respect to the investigations made or
procedures followed in rendering its opinion.
THE FULL TEXT OF THE WEDBUSH WRITTEN OPINION DATED NOVEMBER 3, 1998, WHICH
SETS FORTH THE PROCEDURES FOLLOWED, ASSUMPTIONS MADE, MATTERS CONSIDERED AND
QUALIFICATIONS AND LIMITATIONS ON THE REVIEW UNDERTAKEN, IS ATTACHED AS ANNEX II
TO THIS PROXY STATEMENT AND IS INCORPORATED HEREIN BY REFERENCE WITH THE CONSENT
OF WEDBUSH. THE SUMMARY OF THE WEDBUSH OPINION SET FORTH IN THIS PROXY STATEMENT
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF SUCH OPINION.
STOCKHOLDERS OF CVD ARE URGED TO READ THE WEDBUSH OPINION IN ITS ENTIRETY IN
CONNECTION WITH THEIR CONSIDERATION OF THE PROPOSED MERGER. THE WEDBUSH OPINION
IS ADDRESSED TO THE INDEPENDENT COMMITTEE OF CVD'S BOARD OF DIRECTORS ONLY AND
DOES NOT CONSTITUTE A RECOMMENDATION TO ANY STOCKHOLDER AS TO HOW THAT
STOCKHOLDER SHOULD VOTE AT THE SPECIAL MEETING.
For purposes of its opinion, Wedbush reviewed and analyzed, among other
things: (1) the Merger Agreement and the specific terms of the Merger, (2)
certain publicly available business and financial information relating to CVD
and in general to the medical device and medical technology industry, (3)
certain internal information furnished to Wedbush by the managements of CVD and
Radiance concerning the past and current business operations, financial
condition and future prospects of their respective companies and, in the case of
Radiance, its projected financial results, (4) certain publicly available and
other information concerning the reported price and trading history of CVD's
Common Stock, (5) certain publicly available information with respect to other
medical device and medical technology companies deemed comparable to CVD or
Radiance, and (6) certain publicly available financial terms of selected merger
and acquisition transactions deemed comparable. In addition, Wedbush held
discussions with the managements of CVD and Radiance concerning their views as
to the financial and other information described above, and with the management
of CVD concerning the strategic rationale for, and the benefits expected to
result from, the Merger. Wedbush also had the management of CVD describe to it
the terms of certain ancillary agreements, including the Employment Agreements,
Noncompetition Agreements, Registration Rights Agreements, Lock-Up Agreements
and Escrow Agreement. In addition to the foregoing, Wedbush conducted such other
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analyses and examinations and considered such other financial, economic and
market criteria as it deemed appropriate to arrive at its opinion.
In rendering its opinion, Wedbush assumed and relied upon, without
independent verification, the accuracy and completeness of the information
provided to or reviewed by it for the purposes of its opinion. With respect to
the information provided by CVD and the internal financial projections and other
information provided by Radiance, Wedbush assumed that all such information was
reasonably prepared on bases reflecting managements' best currently available
estimates and judgments as to the expected future financial performance of the
Radiance business. Wedbush assumed that, after the Merger, the Radiance business
will perform substantially in accordance with such projections. Wedbush further
relied on the assurances of managements of CVD and of Radiance that they were
unaware of any facts that would make the information or projections provided to
Wedbush incomplete or misleading. Wedbush did not make and was not provided with
any independent evaluation or appraisal of any of CVD's or Radiance's assets,
liabilities, technology or intellectual property. Wedbush also assumed that all
conditions to the Merger Agreement will be satisfied and not waived.
The opinion necessarily is based upon economic, market and other conditions
and circumstances as they exist and can be evaluated as of the date of such
opinion. Events occurring after that date could materially affect the
assumptions used in preparing the opinion.
The opinion does not address the merits of the business decision of CVD to
enter into the Merger Agreement or to complete the Merger. Furthermore, Wedbush
was not consulted in determining the amount or the composition of the
consideration offered in the Merger. Wedbush is not expressing any opinion as to
what the value of the shares of CVD's Common Stock actually will be, if and when
issued pursuant to the Merger Agreement, or the price at which such shares will
trade following the consummation of the Merger.
Wedbush was selected to render its opinion as to the fairness of the Merger
Consideration from a financial point of view based upon its qualifications,
expertise and reputation. Wedbush is an investment banking firm and a member
firm of the New York Stock Exchange and other principal stock exchanges in the
United States, and is regularly engaged as part of its business in the valuation
of businesses and their securities in connection with mergers and acquisitions,
negotiated underwritings, private placements, secondary distributions of listed
and unlisted securities, and valuations for corporate, estate and other
purposes.
Summary of Analyses
While the following summaries describe the principal elements of the
analyses and examinations that Wedbush performed in arriving at its opinion,
they are not a comprehensive description of all analyses and examinations
actually conducted by Wedbush. The preparation of a fairness opinion involves
various determinations of the most appropriate and relevant methods of financial
analysis and the application of those methods to the particular circumstances,
and, therefore, such an opinion is not susceptible to partial analysis or
summary description. Each of the analyses conducted by Wedbush was carried out
in order to provide a different perspective on the transaction and to add to the
total mix of information available. Wedbush did not form a conclusion as to
whether any individual analysis, considered alone, supported or failed to
support an opinion as to fairness from a financial point of view. Rather, in
reaching its conclusion, Wedbush considered the results of the analyses as a
whole and did not place particular reliance or weight on any individual factor.
Therefore, selecting portions of the analyses and the factors considered,
without considering all such analyses and factors, would create an incomplete or
misleading view of the evaluation process underlying the opinion. The range of
valuations resulting from any particular analysis described herein should not be
taken to be Wedbush's view of the actual value or predicted future value of
Radiance or of CVD's Common Stock.
In performing its analyses, Wedbush made numerous assumptions with respect
to general business and economic conditions such as inflation, interest rates
and various other matters, many of which are beyond the control of CVD and
Wedbush. Any estimates contained in Wedbush's analyses are not necessarily
indicative of actual values or future results, which may be significantly more
or less favorable than indicated by such analyses.
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Such analyses were prepared solely as part of Wedbush's analysis of the
fairness, from a financial point of view, to CVD's stockholders of the Merger
Consideration proposed to be paid by CVD in the Merger. Additionally, estimates
of the values of the businesses and securities do not purport to be appraisals
of the assets or market values of CVD or Radiance, or their respective
securities, nor do they necessarily reflect the prices at which such businesses
or securities may actually be sold.
The following is a summary of the material financial analyses performed by
Wedbush in connection with its opinion.
Summary of the Proposed Merger
Wedbush reviewed the terms of the Merger, including the range, mix and
staged payments of the Merger Consideration available to the holders of each
class of Radiance stock.
Its analysis assumed, among other things, that, (i) each Radiance
stockholder elects the Average Signing Price as the valuation method, (ii) the
Average Signing Price is $3.35 per share (which it deemed not to differ
significantly from the actual Average Signing Price of $3.33 per share in the
Merger Agreement), (iii) CVD elects to pay the maximum amount of the Merger
Consideration in cash, and (iv) each milestone is achieved on schedule. On that
basis, Wedbush calculated the aggregate value of the Merger and adjusted it to
take into account (a) the amount of Radiance stock already owned by CVD, (b) the
amount of cash paid by CVD to Radiance on exercise by CVD of warrants to
purchase 1,500,000 shares of Series B Preferred Stock, (c) the potential cost
savings to CVD with respect to the required payment for foreign distribution
rights to future Radiance products, and (d) the timing of scheduled future
milestone payments using discount rates ranging from 20% to 40%. The calculation
of the adjusted value of the Merger also took into consideration the increase in
value of CVD Common Stock payable to Radiance stockholders to the extent that
they elect the Average Signing Price as the valuation method and the Average
Closing Price exceeds the Average Signing Price.
If the Average Closing Price were to be $3.35 per share, Wedbush calculated
that the resulting adjusted value of the Merger would range from $16,054,000 to
$18,639,000. If the Average Closing Price were to be $4.00 per share, the
adjusted value of the Merger would range from $18,706,000 to $21,395,000.
Finally, if the Average Closing Price were to be $5.00 per share or higher, the
adjusted value of the Merger would range from $22,768,000 to $25,616,000.
Comparable Public Company Analysis
Using publicly available information, Wedbush reviewed and compared certain
financial information relating to Radiance to corresponding financial data,
ratios and public market multiples as of October 30, 1998 for two groups of
publicly-traded cardiovascular/medical device companies ("Comparable
Companies"). One group consisted of eight large market capitalization companies,
and the other group was comprised of 29 small/medium market capitalization
companies ("Comparable Small/Mid Cap Companies"). The two groups of companies
were selected because they have operations that, for purposes of its analysis,
may be considered similar in certain respects to Radiance. Wedbush, however,
placed greater emphasis on the Comparable Small/Mid Cap Companies, given greater
comparability with Radiance.
Wedbush analyzed the enterprise value (calculated as the market
capitalization plus total debt minus cash) for each of the Comparable Companies
as a multiple of latest 12 months ("LTM") (a) revenue, (b) earnings before
interest and taxes and (c) earnings per share ("EPS"). Because Radiance, like
certain of the Comparable Small/Mid Cap Companies, currently does not have
meaningful revenues or earnings, Wedbush concluded that a quantitative,
multiple-driven analysis of historical data would not be meaningful. Therefore,
Wedbush concentrated its analysis on prospective future EPS estimates, as a
benchmark for determining an implied enterprise value.
Wedbush examined publicly available information from equity research
analysts on 1998 and 1999 estimated EPS for the Comparable Small/Mid Cap
Companies, and applied published Institutional Brokers Estimating System
("IBES") five-year EPS growth rates to those estimated EPS to derive future EPS
estimates for years 2000 and 2001. Wedbush then computed the implied enterprise
value for Radiance in year 2001, based on a range of theoretical multiples of
estimated Radiance EPS for that year. The IBES five-year growth rates ranged
from 15.4% to 97%. The resulting multiples ranged from 2.3x to 17.9x (with an
average of
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9.5x and median of 8.0x). Applying the average and median multiples, the implied
enterprise value for Radiance ranged from $27,734,000 to $32,935,000.
Selected Comparable Transaction Analysis
Because Radiance does not currently have meaningful revenues or earnings,
Wedbush believed that a quantitative, multiple-driven analysis based on
comparable merger and acquisition transactions would not be meaningful. However,
Wedbush reviewed the financial terms, to the extent publicly available, of 17
pending or completed merger and acquisition transactions since March 1996 in the
cardiovascular/medical device industry ("Comparable Transactions"). Wedbush
noted that from among the Comparable Transactions, the transaction value of nine
selected early stage companies in product development (without substantial
realized revenue) ranged from $15,500,000 to $171,000,000.
No transaction used in this analysis is identical to the Merger, and no
company used in the analysis is identical to Radiance. Accordingly, an analysis
of the results of the foregoing is not entirely mathematical; rather it involves
complex considerations and judgments concerning differences in financial and
operating characteristics and certain other factors that could affect the
acquisition value of the companies to which it is being compared.
Discounted Cash Flow Analysis
Wedbush performed a discounted cash flow analysis of Radiance using
financial projections provided by Radiance management. Wedbush calculated an
implied enterprise value for Radiance by adding the present value of (i)
estimated free cash flows for years 1998 to 2002, and (ii) the terminal value of
Radiance at the end of year 2002, assuming 2% to 4% perpetual growth rates. The
free cash flow stream and terminal values were then discounted to present value
using rates from 25% to 35%. The resulting implied enterprise value of Radiance
ranged from $5,471,000 to $30,645,000, with an average implied enterprise value
of $16,398,000.
In determining the discount rates, Wedbush noted, among other things, such
general factors as inflation and prevailing interest rates, as well as factors
pertaining to Radiance and the industry in which it operates, including the
inherent risk in its business, the pre-clinical state of its products and
technology and the range of discount rates applied to the analysis of other
recent merger and acquisition transactions involving early-stage companies in
the medical device/medical technology field.
Discounted Future Earnings Analysis
Wedbush reviewed and analyzed the estimated year 2001 earnings for Radiance
based on financial projections provided by Radiance management. Wedbush applied
a range of derived one year forward 1999 earnings multiples to estimated year
2001 fully taxed net income, which was then discounted back two years to 1999.
Forward 1999 earnings multiples for the Comparable Small/Mid Cap Companies
ranged from 8.5 x to 84.3x (with an average of 25.7x and median of 13.7x).
Utilizing these discount rates and applying the median earnings multiple, the
resulting implied enterprise value of Radiance ranged from $26,155,000 to
$30,507,000.
Wedbush Fee
Pursuant to the terms of the engagement agreement, CVD has paid Wedbush a
fee of $200,000, of which $25,000 was payable upon execution of the agreement,
$100,000 was payable at the time Wedbush notified the Committee that it was
prepared to deliver an oral or written opinion, and $75,000 was payable upon the
preparation of the final written opinion and its inclusion in the proxy
materials delivered to CVD's stockholders. CVD has also agreed to reimburse
Wedbush for its expenses incurred in connection with its engagement and to
indemnify Wedbush and its employees, agents, officers, attorneys, shareholders
or any person who controls or is deemed to control Wedbush against certain
liabilities.
In the ordinary course of business, Wedbush and its affiliates may actively
trade the Common Stock of CVD for their own account and for accounts of
customers and, accordingly, may at any time hold a long or short position in the
Common Stock of CVD.
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THE MERGER AGREEMENT
This section of the Proxy Statement describes some aspects of the proposed
Merger of Radiance into Sub, a wholly-owned subsidiary of CVD. The description
of the Merger Agreement contained in this proxy statement is not complete and is
qualified in its entirety by reference to the Merger Agreement, a copy of which
is attached to this Proxy Statement as Annex I and which is incorporated by
reference. You are urged to read the entire Merger Agreement carefully.
STRUCTURE; EFFECTIVE TIME
The Merger Agreement provides for the Merger of Radiance into Sub. Sub will
survive the Merger and continue to exist after the Merger as a wholly-owned
subsidiary of CVD (the "Surviving Corporation"). The Merger will become
effective at such time a Certificate of Merger is filed with the Secretary of
State of Delaware, or a later time if specified in the Certificate of Merger
(the "Effective Time" ). If the Merger is approved by the requisite vote of
CVD's stockholders, the Effective Time is expected to occur on January 14, 1999,
or as promptly as practicable following the satisfaction or waiver of all the
conditions to the Merger.
After the Effective Time the bylaws and certificate of incorporation of the
Surviving Corporation will be those of Sub, until amended in accordance with
such bylaws and Delaware law.
MERGER CONSIDERATION
Primary Consideration
The Merger Agreement provides that each share of Radiance Common Stock
outstanding immediately prior to the Effective Time and each share of Radiance
Preferred Stock outstanding immediately prior to the Effective Time (other than
shares owned by either CVD or Sub) will, at the Effective Time, be converted
into the Primary Consideration (as defined above), the right to receive
Milestone Payments and the right to receive Adjusted Additional Consideration
(as those terms are defined below). All shares of Radiance Common and Preferred
Stock that are owned by CVD or Sub will, at the Effective Time, be cancelled and
no payment will be made for such shares. If the appraisal rights of any shares
of Radiance Capital Stock are perfected, then those shares will be treated as
provided in Section 2.2 of the Merger Agreement.
If the Merger is completed, CVD will pay the stockholders of Radiance the
primary consideration of $3.00 for each share of Radiance Preferred Stock and
$2.00 for each share of Radiance Common Stock. In addition, Radiance
stockholders and optionholders may receive milestone payments of up to $2.00 for
each share of Series A Preferred Stock and $3.00 for each share of Common Stock
(or underlying options) owned based on the occurrence of milestone events
leading to regulatory approval, and an additional adjusted payment upon the
registration of the CVD Common Stock with the SEC. Holders of Radiance Common
Stock and optionholders will receive CVD Common Stock as payment for their
shares and milestone payments. Holders of Radiance Series A Preferred Stock will
receive CVD Common Stock and, at CVD's option, may receive up to 30% of the
payment in cash.
Options for Radiance Common Stock will accelerate and vest immediately
prior to the completion of the Merger. If the options are exercised prior to
completion of the Merger, the holders of the underlying Radiance Common Stock
will receive the same consideration for their shares as other holders of
Radiance Common Stock. If not exercised prior to completion of the Merger, CVD
shall assume the option which shall then be exercisable by its holder and be
converted into an option at the same exercise price, to purchase a number of
shares of CVD Common Stock equal to $2.00, based on the average of the closing
prices of CVD Common Stock as reported on the Nasdaq for the twenty trading days
ending on the trading day preceding the Closing (the "Average Closing Price").
Holders of options will also receive the milestone payments for each share of
CVD Common Stock to which they are entitled, whether or not they exercise those
options.
The total amount to be paid to all holders of Radiance capital stock at
closing will be approximately $7.0 million. Assuming all product development
milestones are met on scheduled dates, no options are exercised and there is no
adjustment upon registration of the CVD Common Stock with the SEC, an
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additional amount of approximately $6.9 million of CVD Common Stock and cash, if
CVD so elects will be issued to Radiance Stockholders.
Radiance stockholders on December 15, 1998 elected one of two values for
the CVD Common Stock to be issued as part of the Primary Consideration. Each
Radiance stockholders elected to have his or her stock valued at either: (i) the
average of the closing prices of the CVD Common Stock over the 20 trading days
prior to the Closing of the Merger (the "Average Closing Price"); or (ii) $3.33
(the "Average Signing Price"), subject to certain collar provisions. For those
Radiance stockholders electing the second alternative, if the Average Closing
Price is greater than $5.00, the value of CVD Common Stock shall be the Average
Closing Price as adjusted by multiplying the Average Closing Price by 0.667
(which is $3.33 divided by $5.00); and if the Average Closing Price is less than
$2.00, the value of CVD Common Stock shall be the Average Closing Price as
adjusted by multiplying the Average Closing Price by 1.665 (which is $3.33
divided by $2.00). Any Radiance stockholder who does not elect one of the two
options shall be issued CVD Common Stock valued at the Average Closing Price.
Stockholders holding 90% of the outstanding shares elected option (ii), above.
The remaining stockholders elected option (i), above.
Adjusted Additional Consideration and Registration
CVD will file a registration statement with the SEC covering the resale of
the shares of CVD Common Stock issued in connection with the Merger within five
days of the Closing of the Merger. If the registration statement is not
effective within 30 days of the Closing of the Merger and if the closing price
of CVD Common Stock on the trading day preceding the date of effectiveness of
the registration statement (the "Registration Date Price") is less than the
Average Closing Price, CVD will pay to Radiance stockholders the difference
between the Average Closing Price and the Registration Date Price for each share
of CVD Common Stock issued to Radiance stockholders in the Merger. CVD may elect
to make these payments to the holders of Radiance Preferred Stock in its Common
Stock or a combination of its Common Stock and up to 30% cash, provided, CVD
shall not pay in excess of 30% of the total merger consideration in cash. See
the description below in this Proposal No. 1, "THE MERGER AGREEMENT -- Form of
Consideration."
Any adjusted Additional Consideration shall be paid by CVD within 10 days
of the effective date of such registration at the Registration Date Price.
Milestone Payments
CVD has identified four important junctures in the process of obtaining
United States and European regulatory approval that are critical to bringing the
Radiance technology to the marketplace. The four milestones, the target dates
for reaching the milestones, and the payments to be made by CVD on these dates
are set forth below:
<TABLE>
<CAPTION>
PAYMENT TO RADIANCE PAYMENT TO RADIANCE
PREFERRED STOCK COMMON STOCK
---------------------- ----------------------
MILESTONE TARGET DATE PER SHARE AGGREGATE* PER SHARE AGGREGATE*
--------- ------------------ --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C>
Approval of IDE for Clinical
Trials in U.S................... April 30, 1999 $0.3079 $ 656,942 $0.4615 $145,373
CE Mark Approval.................. June 30, 2000 0.6153 1,312,818 0.9231 290,777
PMA filed in U.S.................. September 30, 2000 0.6153 1,312,818 0.9231 290,777
PMA Approval in U.S............... October 31, 2001 0.4615 984,667 0.6923 218,075
------- ---------- ------- --------
Total................... $ 2.00 $4,267,244 $ 3.00 $945,000
======= ========== ======= ========
</TABLE>
- ---------------
* Assumes 2,133,622 shares of Series A Preferred Stock and 315,000 shares of
Common Stock are outstanding as of the Closing. Assuming options to purchase
550,000 shares are outstanding as of the Closing, CVD will pay an aggregate of
$1,650,000 to such optionholders upon the timely achievement of all milestone
targets.
The payments by CVD to the former holders of Radiance capital stock and
options depend on the date that each of these milestones is achieved. For each
30 day period that a milestone is reached ahead of the
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<PAGE> 30
target date Radiance stockholders will receive an additional 10% of that
milestone payment. However, for each 30 day period behind the target date the
milestone payment will be reduced 10%. Former Radiance stockholders and
optionholders may receive no more than 130% of any milestone payment, and no
payment will be paid if a milestone is not reached within 120 days of the target
date. Upon a change in control of CVD which is not approved by CVD's Board of
Directors, all Milestone Payments shall accelerate and become payable upon the
change in control.
CVD will make the Milestone Payments in its Common Stock or in a
combination of its Common Stock and cash. CVD Common Stock will be valued for
each Milestone Payment at the average of the closing prices for CVD Common Stock
for the 20 trading days preceding the achievement of the Milestone (a "Milestone
Average Price"). Payment upon achievement of the milestones by CVD could result
in significant dilution to current CVD stockholders. If a Milestone Average
Price is less than $5.00, then CVD can elect to pay up to 30% of that Milestone
payment in cash. In addition, CVD can withhold delivery of a Milestone Payment
if it has an indemnifiable claim against Radiance made during the period of
indemnification of CVD by Radiance.
Total Consideration
The Primary Consideration, the Adjusted Additional Consideration and the
Milestone Payments constitute the Merger Consideration. The total value of the
CVD Common Stock to be issued to the Radiance stockholders at the Closing will
be approximately $7.0 million, calculated as set forth under "Primary
Consideration" above. Assuming all product development milestones are met on
scheduled dates, no options are exercised and there is no adjustment upon
registration of the CVD Common Stock with the SEC, an additional amount of
approximately $6.9 million of CVD Common Stock will be issued to former Radiance
stockholders and optionholders, calculated as set forth under "Milestone
Payments" above.
FORM OF CONSIDERATION
CVD may pay up to 30% of the Primary Consideration and the Adjusted
Additional Consideration paid to Radiance Preferred Stockholders in cash if the
Average Closing Price is less than $5.00. CVD will set aside a certain amount of
cash subject to not impairing the tax free status of the Merger if it elects to
pay a portion of the Merger consideration in cash. Radiance Preferred
Stockholders as a group will receive that amount of cash for their shares.
In the event CVD decides to pay some of the Merger consideration in the
form of cash, each holder of Radiance Preferred Stock will be entitled to elect
to receive all or a portion of such holder's Primary Consideration and Adjusted
Additional Consideration in cash. However, if the Radiance Preferred
Stockholders request more cash than the amount set aside by CVD, Radiance
Preferred Stockholders electing to receive cash will receive only a proportional
amount of cash. If Radiance Preferred Stockholders request less cash than CVD
has set aside, stockholders electing to receive stock will receive only a
proportional amount of stock that they have elected to receive.
OPTIONS
Under the Merger Agreement, options for 550,000 shares of Radiance Common
Stock will vest and become exercisable immediately upon prior to the completion
of the Merger. If the Radiance options are exercised prior to the Effective
Date, the holders of the underlying Radiance Common Stock will receive the same
consideration for their shares as other holders of Radiance Common Stock. If the
options are not exercised prior to completion of the Merger, CVD shall assume
the existing Radiance option plan and the Radiance options. Each assumed option
shall be converted into an option to purchase $2.00 worth of CVD Common Stock,
based on the Average Closing Price. Optionholders also are entitled to any
Milestone Payments for each share of Radiance Common Stock underlying their
original option, whether or not the options are exercised.
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<PAGE> 31
REPRESENTATIONS AND WARRANTIES
The Agreement contains various customary representations and warranties
relating to, among other things, (i) incorporation, organization, authority and
similar corporate matters on behalf of each of CVD and Radiance; (ii) authorized
and outstanding capital stock of each of CVD and Radiance; (iii) authorization,
execution, delivery and enforceability of the Agreement and related matters;
(iv) certain documents filed by CVD with the Securities and Exchange Commission
and the accuracy of information contained therein; (v) compliance with law; (vi)
litigation; (vii) taxes; (viii) retirement and other employee plans and matters
relating to the Employee Retirement Income Security Act of 1974, as amended
("ERISA"); and (ix) absence of certain material changes and events.
ADDITIONAL AGREEMENTS
Pursuant to the Agreement, CVD and Radiance have agreed to various other
matters. These additional agreements must be fulfilled as a condition to the
completion of the Merger. Some of these additional agreements are: (i) each
party has access to information of the other party; (ii) each party shall
maintain the confidentiality of the other party's information; (iii) CVD shall
register the shares of its Common Stock issued in connection with the Merger;
(iv) CVD shall file an application for listing its Common Stock issued in the
Merger on the Nasdaq National Market; (v) CVD shall use its reasonable best
efforts to obtain the consent of its stockholders; (vi) Maurice Buchbinder,
M.D., shall be appointed Medical Director of CVD for four years, a position
which entitles Dr. Buchbinder to receive stock options; (vii) after the Merger,
CVD shall cause Sub to appoint a radiation management committee initially
composed of Michael Henson, Jeffrey O'Donnell and Maurice Buchbinder, M.D. to
oversee the development of radiation products; (viii) CVD shall enter into
employment agreements for terms of two years with each of Michael Henson and
Brett Trauthen; (ix) CVD shall enter into noncompetition agreements with each of
Michael Henson, Maurice Buchbinder, M.D. and Brett Trauthen; and (x) after
signing the Merger agreement, Radiance will not initiate, solicit or encourage
any proposal to merge with, consolidate with, or be acquired by any other
entity, or any consider any acquisition or similar transaction.
The radiation management committee will oversee the operations of CVD with
respect to the development of radiation therapy products. CVD has agreed to
spend at least $10,000,000 on research and the development of radiation therapy
products during the two years following the completion of the Merger. CVD has
agreed that a majority of such spending will be directed toward matters included
in the milestones, but is subject to the business judgment of the Board of
Directors of CVD.
CERTAIN COVENANTS
Pursuant to the Agreement, CVD and Radiance have agreed that between the
date of the Agreement and the Effective Time of the Merger, except as permitted
in the Merger Agreement or otherwise consented to in writing, Radiance will (i)
carry on its business in the ordinary course consistent with prior practice;
(ii) not declare or pay any dividends other than in the ordinary course
consistent with prior practice; (iii) not issue additional shares of capital
stock; (iv) not merge or consolidate with another entity; (v) not incur any
liens or security interests or encumber any of its property; and (vi) not take
any action to cause the Merger not to be treated as a tax free reorganization
under applicable law. The parties have agreed that CVD will (i) carry on its
business in the ordinary course consistent with prior practice; (ii) use all
reasonable efforts to take all actions necessary to effectuate the Merger; (iii)
timely file all filings required under the Securities and Exchange Act and (iv)
not take any action to cause the Merger not to be treated as a tax free
reorganization under applicable law.
CERTAIN CONDITIONS TO CLOSING
Under the Agreement, consummation of the Merger is subject to the approval
of CVD and Radiance stockholders and certain other conditions, unless waived by
the party benefiting therefrom. On December 15, 1998, the Radiance stockholders
approved the Merger. These conditions include, but are not limited to: (i) the
execution of employment agreements between CVD and Michael R. Henson and Brett
Trauthen;
27
<PAGE> 32
(ii) the execution of non-competition agreements between CVD and Brett Trauthen,
Maurice Buchbinder, M.D. and Michael R. Henson; (iii) approval of the Merger by
governmental authorities without burdensome conditions; (iv) the absence of any
temporary restraining order, preliminary or permanent injunction or other legal
restraint or prohibition that prevents completion of the Merger; (v) the
accuracy of the representations and warranties made by CVD and by Radiance as of
the date the Merger Agreement was signed and as of the closing of the Merger;
(vi) receipt by Radiance of all necessary contractual consents; (vii) execution
by Michael Henson and Maurice Buchbinder, M.D. of lock-up agreements restricting
resales of the CVD Common Stock for 180 days after execution and delivery of the
Merger Agreement; (viii) receipt by CVD of an executed escrow agreement from the
escrow agent and a representative of the Radiance Stockholders and (ix)
compliance with all material covenants.
INDEMNIFICATION
Each of CVD and Radiance has agreed to indemnify the other party against
any losses arising out of or due to the breach of such party's representations,
warranties or covenants contained in the Agreement. The indemnification
obligation does not arise until the aggregate amount of such losses arising out
of all such breaches exceeds $100,000, in which case the indemnifying party will
be liable for all amounts. Any claim for indemnification upon breach of a
representation, warranty or covenant must be brought within one (1) year of the
Effective Time. CVD's sole remedy under any indemnification claim against
Radiance is limited to amounts in the Escrow Fund. There will be no money
available in the Escrow Fund for indemnification of CVD unless and until
Radiance has earned milestone payments and CVD has a pending claim for
indemnification. See the discussion below, "Escrow Agreement."
CVD also has agreed to indemnify, to the fullest extent under the Delaware
Law, all officers and director of Radiance as of the Closing in any action
brought against all such individuals by existing stockholders and optionholders
of Radiance immediately prior to the Merger as a result of the Merger.
ESCROW AGREEMENT
CVD and the Radiance stockholders (with Tracy Pearson, an optionholder in
Radiance and an employee of CVD, serving as the representative for the Radiance
stockholders) will establish an escrow agreement with an escrow agent prior to
the completion of the Merger. The Escrow Agreement will be available in the
event CVD makes a claim within one year from the effective time of the Merger
for indemnification for breach of the representations, warranties or covenants
under the Merger Agreement. In the event CVD has such a pending claim, then all
or a portion of any subsequent milestone payments due to the Radiance
stockholders will be deposited by CVD in an escrow fund (the "Escrow Fund"). The
Escrow Agreement specifies how the parties are to resolve any dispute over the
Escrow Fund, and the procedure for paying any of the Escrow Fund to CVD or to
the former Radiance stockholders. THE ESCROW AGREEMENT IS ATTACHED AS EXHIBIT A
TO THE MERGER AGREEMENT, WHICH IS ATTACHED TO THIS PROXY STATEMENT AS ANNEX I,
AND YOU ARE ENCOURAGED TO READ IT IN ITS ENTIRETY.
The total amount of milestone payments deposited into the Escrow Fund shall
not exceed the amount of then pending claims for indemnification. Any excess
milestone payments in the Escrow Fund, and any milestone payments payable at
such time when no claims are pending, shall be paid to the Radiance
stockholders. Therefore, there will be no money available in the Escrow Fund for
indemnification of CVD unless and until Radiance has earned milestone payments
and CVD has a pending claim for indemnification.
EMPLOYMENT AGREEMENTS
Pursuant to the Merger Agreement, CVD will enter into an employment
agreement with each of Michael Henson and Brett Trauthen. Mr. Henson will be
employed as Chairman of the Board of Directors of CVD for two years following
the Closing, and will serve as Chief Executive Officer following the
effectiveness of Jeffrey O'Donnell's resignation to be effective shortly after
the special meeting of the stockholders. He will devote substantially all of his
efforts to CVD and receive, as a base salary, $264,000 per year. Mr. Henson's
base compensation will be reviewed annually by the Compensation Committee of the
Board of Directors of
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<PAGE> 33
CVD. In addition, Mr. Henson will be entitled to participate in incentive
compensation plans of CVD and be eligible to receive a bonus with up to 35% of
his base salary. The agreement may be terminated by CVD. In the event it is
terminated without cause, Mr. Henson would be entitled to severance payment
equal to his then-current base salary for the remainder of the term and all of
his options to purchase shares of stock of CVD shall accelerate and vest by one
additional year.
Mr. Trauthen will be employed as Director for Research and Development for
Coronary Radiation Catheter products and receive, as a base salary, $115,000 per
year. Mr. Trauthen's base compensation will be reviewed annually by the
Compensation Committee of the Board of Directors of CVD. In addition, Mr.
Trauthen will be entitled to participate in incentive compensation plans of CVD
and be eligible to receive a bonus with up to 20% of his base salary. The
agreement may be terminated by CVD. In the event it is terminated without cause,
Mr. Trauthen would be entitled to severance payment equal to his then-current
base salary for the remainder of the term and all of his options to purchase
shares of stock of CVD shall accelerate and vest by one additional year.
NONCOMPETITION AGREEMENTS
In connection with the Agreement, CVD intends to enter into non-competition
agreements with each of Michael Henson, Maurice Buchbinder, M.D., and Brett
Trauthen. The non-competition agreements will provide that for three years
following the Closing, those individuals will not compete with CVD, subject to
certain exceptions.
TERMINATION; AMENDMENT; EXPENSES
CVD and Radiance mutually can agree to terminate the Merger, and either
company can terminate the Merger Agreement if: (i) the Merger is not completed
by February 1, 1999, but CVD may extend such date to April 30, 1999 by loaning
Radiance $1.0 million in exchange for a promissory note which is convertible at
CVD's option into Radiance equity securities in the next round of Radiance
equity financing; (ii) the Average Closing Price is less than $1.50; (iii) any
governmental or regulatory authority whose action is required for the Merger
decides not to take any action; (iv) the other party materially breaches any of
its covenants in the Merger Agreement; (v) a court issues a final order
permanently prohibiting the Merger or (vi) if the required stockholder vote of
the other party necessary for completion of the Merger is not obtained.
The terms and conditions of the Merger Agreement may be waived, modified or
extended by written agreement between the parties.
All costs and expenses incurred in connection with the Merger Agreement and
the transactions contemplated thereby, including legal and accounting fees and
expenses, will be paid by the party incurring such expenses. However, if the
Merger is not completed because one party cannot obtain the consent of its
stockholders, that party will pay the costs of the other party up to $30,000.
The stockholders of Radiance approved the Merger on December 15, 1998.
Otherwise, the Merger Agreement provides that all costs and expenses incurred in
connection with the Merger Agreement and the transactions contemplated thereby,
whether consummated or not, will be paid by the party incurring such cost or
expense.
ACCOUNTING TREATMENT OF TRANSACTION
In accordance with Generally Accepted Accounting Principles, when CVD
exercised its warrant to purchase 1,500,000 shares of Radiance Series B
Preferred Stock on September 10, 1998, and attained a controlling interest in
Radiance, CVD's share of Radiance's results of operations had to be included in
CVD's consolidated results of operations under the purchase method of
accounting. Likewise, the acquisition of the remaining stock under the Merger
Agreement not held by CVD will be treated as a purchase. The Merger will be
recorded based upon the underlying fair value of the net assets acquired at the
Closing Date. As a result of the Merger, CVD will record approximately $4.0
million in intangible assets, which will be amortized over periods not to exceed
seven years. Additionally, approximately $3.6 million of the acquisition cost
will be expensed as acquired in-process research and development. The
aforementioned amounts allocated to
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<PAGE> 34
intangible assets and expenses may change materially based upon the final
conclusions of an independent appraisal.
In accordance with Generally Accepted Accounting Principles, any milestone
payments made will be recorded as additions to intangible assets and amortized
over periods not to exceed approximately seven years.
CERTAIN INCOME TAX CONSEQUENCES
CVD intends the Merger to qualify as a tax free reorganization under
Section 368(a)(1)(A) and Section 368(a)(2)(D) of the Internal Revenue Code.
FEDERAL SECURITIES LAW CONSEQUENCES; REGISTRATION RIGHT; LOCK-UP
The shares of CVD Common Stock to be issued to Radiance pursuant to the
Merger Agreement will not be registered at the Effective Time under the
Securities Act of 1933, as amended (the "Act"). As such, the shares may be sold
only after registration under the Act or under an exemption from such
registration.
CVD agreed to register for re-sale the shares of CVD Common Stock issued as
payment of the merger consideration by filing a registration statement with the
SEC within five business days after the closing date of the Merger. Radiance
will use its best efforts to have the Radiance stockholders enter into a
registration rights agreement, which specifies the procedures for the
registration of the CVD Common Stock. THE REGISTRATION RIGHTS AGREEMENT IS
ATTACHED AS EXHIBIT B TO THE MERGER AGREEMENT, WHICH IS ATTACHED TO THIS PROXY
STATEMENT AS ANNEX I, AND YOU ARE ENCOURAGED TO READ IT IN ITS ENTIRETY. In
addition, Michael Henson and Maurice Buchbinder, M.D. are required by the Merger
Agreement to enter into lock-up agreements which shall restrict the re-sale of
the CVD Common Stock issued as payment of the merger consideration for a period
of 180 days after the date of the Merger Agreement, May 2, 1999.
NASDAQ NATIONAL MARKET LISTING
CVD agreed to file an application for original listing of the shares of CVD
Common Stock on the Nasdaq National Market to be issued in the Merger. CVD will
file such application prior to the Closing of the Merger.
APPRAISAL OR DISSENTERS' RIGHTS
Stockholders of CVD will not be entitled to any appraisal or dissenters'
rights in connection with the Merger.
REGULATORY APPROVAL
There are no federal or state regulatory requirements which must be
complied with or approval which must be obtained in connection with the Merger.
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<PAGE> 35
PRICE RANGE OF COMMON STOCK AND DIVIDEND HISTORY
CVD Common Stock is traded on the Nasdaq National Market under the symbol
"CCVD." An application with Nasdaq will be made to have the CVD Common Stock
trade under the symbol "RADX," in the event the Merger is consummated and the
name change approved.
The table below sets forth, for the calendar quarters indicated, the
reported high and low closing sale prices of the CVD Common Stock as reported on
the Nasdaq National Market.
The Company's Common Stock commenced trading on the Nasdaq National Market
on June 20, 1996. The following table sets forth for the periods indicated the
high and low sale prices for the Common Stock as reported on the Nasdaq National
Market.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
FISCAL 1996
Second Quarter.............................................. $12 3/4 $10 1/2
Third Quarter............................................... 17 1/2 10 1/4
Fourth Quarter.............................................. 17 1/2 9 5/8
FISCAL 1997
First Quarter............................................... $13 1/4 $ 7 1/2
Second Quarter.............................................. 10 1/4 6 5/8
Third Quarter............................................... 9 3/8 6 5/8
Fourth Quarter.............................................. 8 4 3/4
FISCAL 1998
First Quarter............................................... $ 6 3/8 $ 4 3/16
Second Quarter.............................................. 7 3/4 4 5/8
Third Quarter............................................... 6 1/4 2 1/2
Fourth Quarter (through December 11, 1998).................. 5 2 3/4
</TABLE>
No dividends have been paid by CVD. CVD does not anticipate paying
dividends in the foreseeable future.
On September 23, 1998, the last full trading day prior to the public
announcement of the execution and delivery of the letter of intent regarding the
proposed Merger, the high and low sale prices on the Nasdaq National Market were
$4.00 per share and $3.13 per share, respectively. On November 3, 1998, the date
of execution of the Merger Agreement, the closing sale price was $3.75, and the
Average Signing Price (closing prices over 20 trading days prior to such date)
was $3.33. On December 11, 1998, the most recent practicable date prior to the
printing of this Proxy Statement, the closing sale price on the Nasdaq National
Market was $3.625 per share and there were approximately 276 record holders of
CVD Common Stock.
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<PAGE> 36
BUSINESS OF RADIANCE
INTRODUCTION
Radiance is a research and development stage company in the field of
Radiotherapy (radiation therapy) for the treatment of cardiovascular disease.
Radiance is focused on researching technology to developing proprietary devices
for the prevention of the recurrence of atherosclerotic blockages following the
interventional treatment of atherosclerosis. Radiance's primary product is a
catheter-based delivery system to deliver radioactive materials to the area of
an artery that has been treated with conventional interventional therapy such as
Percutaneous Transluminal Coronary Angioplasty ("PTCA"), atherectomy and/or
stent deployment. Radiance's principal executive offices are located at 13700
Alton Parkway, Suite 170, Irvine, California, 92618, and its telephone number is
(949) 595-7229.
INDUSTRY BACKGROUND
Coronary Artery Disease
Coronary artery disease is the leading cause of death in the United States.
More than 13 million people in the United States currently have been diagnosed
with coronary artery disease, which is generally characterized by the
progressive accumulation of plaque as a result of the deposit of cholesterol and
other fatty materials on the walls of the arteries. The accumulation of plaque
leads to a narrowing of the interior passage, or lumen, of the arteries,
reducing blood flow to the heart. When blood flow to the heart becomes
insufficient, the oxygen supply is restricted, resulting in a heart attack
and/or death. Each year more than 900,000 revascularization procedures are
performed in the United States, and approximately 1.5 million such procedures
are performed worldwide, to treat coronary artery disease and increase blood
flow to the heart.
Types of Treatment
The two most common forms or treatment for coronary artery disease are: (i)
the coronary artery bypass graft ("CABG"); and (ii) PTCA and other
catheter-based technologies. CABG is a highly invasive, open surgical procedure
in which blood vessel grafts are used to bypass the site of a blocked artery,
thereby restoring blood flow. CABG, still considered the most effective and
long-lasting treatment for coronary artery disease, is generally the primary
treatment for severe coronary artery disease involving multiple vessels. In
addition, CABG is often a treatment of last resort for patients who have
undergone other less invasive procedures but require reintervention. CABG,
however, has significant limitations, including medical complications, such as
stroke, multiple organ dysfunction, inflammatory response, respiratory failure
and post-operative bleeding, each of which may result in death. In addition,
CABG is a very expensive procedure and requires a long recovery period. In the
United States, the cost of undergoing CABG is approximately $32,000 to $36,000
and the average post-operative recovery period following CABG is approximately
six to eight weeks. Approximately 400,000 CABG procedures are performed annually
in the United States. Currently, several minimally invasive surgical techniques
are being developed to lessen the cost and trauma of CABG procedures.
PTCA is the principal, less invasive alternative to CABG. PTCA is a
procedure performed in a cath lab by an interventional cardiologist. During
PTCA, a guidewire is inserted into a blood vessel through a puncture in the leg
(or arm in some cases) and guided through the vasculature to a diseased site in
the coronary artery. A balloon-tipped catheter is then guided over the wire to
the deposit of plaque ("lesion") occluding the artery. Once the balloon is
positioned across the lesion inside the vessel, the balloon is inflated and
deflated several times. Frequently, successively larger balloons are inflated at
the lesion site, requiring the use of multiple balloon catheters. The inflation
of the balloon cracks or reshapes the plaque and the arterial wall, thereby
expanding the arterial lumen. Though injury to the arterial wall often occurs
under balloon pressure, PTCA typically results in increased blood flow without
the actual removal of any plaque. In 1997, more than 600,000 PTCA procedures
were performed in the United States. The average cost of each PTCA procedure is
approximately $15,000, or less than one half of the average cost of CABG, and
the length of stay and recuperation period are substantially less than required
for CABG.
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<PAGE> 37
The principal limitation of PTCA is the high rate of restenosis, a
re-narrowing of a treated artery, which generally requires reintervention. Due
to the effects of restenosis, the long-term cost-effectiveness of PTCA has not
proven greater than that of CABG. Studies have indicated that within six months
after PTCA, between 25% and 45% of PTCA patients experience restenosis. In
addition, 60% of patients with multi-vessel coronary artery disease who received
PTCA have been shown to require reintervention within three years of treatment.
Although the average cost of PTCA initially is less than one-half of the cost of
CABG, a recent study indicated that three years after the procedure, PTCA has no
cost advantage over CABG due to the need for subsequent interventional
treatment.
A variety of other catheter-based, minimally invasive, interventional
devices for coronary artery disease have been developed in an attempt to reduce
the frequency of restenosis following PTCA. These devices include atherectomy
devices (catheter devices that cut and remove plaque from the arterial wall),
rotational ablation devices (catheter devices which use a rotating burr to
remove plaque), and laser catheter devices (devices that use laser energy to
reduce plaque in arteries). Although these new approaches to coronary artery
disease have been found to be effective in certain lesion types and in certain
locations in the coronary arteries, they still exhibit high rates of restenosis.
Restenosis
Clinical restenosis is typically defined as a renarrowing of a coronary
artery within six months of a revascularization treatment to less than 50% of
its original size. Restenosis is a vascular response to arterial injury and
occurs frequently after a revascularization procedure, which stretches coronary
arteries or otherwise damages the treated segment of the artery. Due to multiple
mechanisms controlling vascular repair, restenosis may occur within a short
period after a revascularization procedure or may develop over the course of
months or years. Restenosis that occurs shortly after a revascularization
procedure is usually attributed to elastic recoil (acute loss of lumen diameter)
of the artery.
Restenosis occurring a longer period of time after a revascularization
procedure may result from excessive proliferation of cells at the treatment site
("hyperplasia") or from a generalized geometric remodeling of the arterial
segment, the causes of which are not well understood. Hyperplasia is a
physiological response to injury, similar to scarring which occurs in wound
healing. In response to an arterial injury from revascularization, the body
initiates a biochemical response to repair the injury site and protect it from
further harm. This response will include a signal to adjacent cells of the
arterial wall to multiply. Often this cell proliferation goes unchecked,
resulting in a much thicker and inelastic arterial wall and in reduced blood
flow. CVD and Radiance believe that hyperplasia and vascular remodeling may be
responsible for a large portion of the overall effect of restenosis.
Coronary Stenting
Coronary stents are expandable, implantable metal devices permanently
deployed at a lesion site. Stents maintain increased lumen diameter by
mechanically supporting the diseased site in a coronary artery. Of all the
non-surgical treatments which have sought to improve upon PTCA, stents have
demonstrated the best results in reducing the rate of restenosis. In a typical
stent procedure, the artery is pre-dilated at the lesion site with a balloon
catheter and the stent is delivered to the site of the lesion and deployed with
the use of a second balloon catheter, which expands the stent and firmly
positions it in place. This positioning is often followed by a third dilatation
using a high pressure balloon to fully expand and secure the stent. Once placed,
stents exert radial force against the walls of the coronary artery to enable the
artery to remain open and functional.
Recent studies have concluded that the rate of restenosis in patients who
receive coronary stents following PTCA is approximately 30% lower than in
patients treated only by PTCA. Additional clinical studies with stents which
incorporate a specialized coating may show a greater reduction in the rate of
restenosis. Stents appear to be effective in reducing the frequency of
restenosis resulting from elastic recoil and appear to limit vascular
remodeling, but may increase, rather than decrease, hyperplasia.
The use of stents has grown rapidly since commercial introduction in the
United States in 1994, and they were utilized in approximately 300,000 of the
approximately 600,000 PTCA procedures performed in the
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United States in 1997. Despite their rapid adoption, stents have certain
disadvantages. Not only are they permanent implants which may result in
unforeseen long-term adverse effects, but they cannot be used in cases where the
coronary arteries are too tortuous or too narrow. In addition, the use of stents
approximately doubles the cost of a PTCA procedure and restenosis may still
occur, often requiring reintervention in patients who receive stents.
Radiotherapy
For more than 100 years, radiotherapy has been used routinely to treat
cellular proliferative disorders in humans. While externally applied radiation
has shown little beneficial effect on treated arteries, the application of Beta
and Gamma radiation at the site of arterial injury has proven more useful in
treating restenosis.
Gamma radiation has been demonstrated in a number of models to inhibit the
cellular proliferation associated with the restenosis mechanism. Gamma is
compatible with vessels of all sizes but is more complicated to use in the cath
lab because of its activity.
Beta radiation has been demonstrated to inhibit intimal hyperplasia. Since
Beta radiation travels only a short distance (2-4 mm) before loosing its
therapeutic value, it is imperative that the source be placed as close as
possible to the arterial wall. This relatively short distance of travel makes
its compatible with current cath lab practices. Dosage is calculated by knowing
the energy level of the source and the distance from the treatment target.
Uniform dosage to the intended area is dependent upon maintaining a consistent
energy field.
The placement of guidewire based systems of radiation transport in the
curved coronary anatomy has been shown to produce inconsistent dosages to actual
tissue because of the different distances the guidewire lays from the vessel
wall over the length of the active wire. When guidewire centering balloons are
used, the beneficial effect of the radiation is lost over the distance from the
wire to the arterial wall. As the vessel diameter increases, the therapeutic
effect also diminishes. If any benefit is to be realized with guidewire based
techniques it would be limited to small diameter, straight arteries. The
extended inflation times of the centering balloon required to insure adequate
dosage also may result in ischemia and unacceptable discomfort or hazard to the
patient.
A stent activated to emit Beta radiation would overcome the proximity
issues inherent in a guidewire delivery system by placing the Beta source
directly opposed to the vessel. This approach assumes a one dose for all
patients, removing control of dose from the clinician. This approach assumes a
vessel of fixed size and that the energy level of the implanted stent will be
adequate to deliver the required radiation dosage after implant. Vessel diameter
is often difficult to quantify. As a stent expands, the space between its active
elements increases. Since the radioactive stent cannot be removed after
placement, the patient continues to receive the ionizing effects until the
radiation dissipated over five half lives of the isotope used. In the case of
Beta p32 this is approximately 70 days.
PRODUCTS AND TECHNOLOGY
Radiance believes that it has catheter and radiation source technology that
can deliver radioactive materials to the localized site safely and effectively.
Radiance's technology enables solid form radioactive material, of virtually any
isotope to be integrated into the wall of the balloon material itself, which
creates a balloon/source angioplasty catheter. The Radiance approach combines
the demonstrated benefits of Beta radiation with the utility of direct vessel
wall apposition associated with balloon dilatation.
Radiance currently is focusing on the development of the RMS Radiation
Delivery Balloon Catheter System (the "RDX Catheter"). The RDX Catheter consists
of an expandable dual balloon system which enables the radiation dosage to be
delivered precisely to the vessel wall. Since the balloon is in contact with the
wall, this method of delivering Radiotherapy is appropriate for vessels of any
diameter with proper balloon size selection.
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This dual balloon concept also enables the RDX Catheter to be used to
perform both PTCA and/or stent deployment and deliver Radiotherapy on a single
catheter. Radiance is unaware of any competing technology that provides this
combination of benefits, versatility and multifunctionality.
Because the Beta source is positioned relatively close to the vessel wall
and the exact radiation strength is known prior to delivery, accurate dose
calculations can be made to customize patient treatment. This device may also
incorporate a perfusion system to maintain blood flow distal to the inflated
balloon to permit longer inflation times, if required, to optimize radiation
dosage delivery effectively.
CVD believes that the RDX Catheter has several technical and clinical
advantages for the treatment of restenosis.
- The RDX Catheter provides complete apposition to the arterial wall,
reducing the problems of distance determination and closing with current
vascular radiotherapy devices.
- The RDX Catheter can deliver equal or higher radioisotope activity with
less total radiation dose than other technologies.
- The fully-deployable radiation source is independent of vessel size.
Coronary arteries range from 1.5 - 6.0 millimeters. With other devices, a
different dose of radiation has to be calculated and/or delivered for
each vessel size. With the RDX Catheter, the dose is the same regardless
of the vessel dimensions. This also makes the RDX Catheter systems useful
in other vascular applications such as coronary, peripheral vascular leg
arteries, renal, carotid and kidney dialysis grafts. This potentially
broadens the clinical utility and market potential for the RDX system.
- The RDX Catheter is simple and easy-to-use. Use of the RDX Catheter is
consistent with the use of other types of catheters by interventional
cardiologists.
- The solid film substrate is totally protected by the double balloon
construction. The use of the Beta isotope within the system increases the
safety of the RDX Catheter as a vascular radiotherapy delivery device.
Radiance currently is focusing on developing products for the treatment of
restenosis following the interventional treatment of atherosclerosis. CVD,
however, believes that its technology may eventually be utilized to prevent and
treat restenosis in all vascular segments of the body, including coronary,
peripheral vascular, carotid, neurovascular and renal arteries.
While CVD believes that the RDX Catheter technology may prove superior to
competing technologies, there is no assurance that CVD will be successful in
developing and marketing the RDX Catheter technology or any other radiation
therapy technology, that such products or radiation therapy in general will
receive market acceptance or that such products, whether under development or
commercialized, will not be rendered obsolete as a result of technological
changes.
MARKETING
No Radiance products currently are commercially available.
REGULATORY AND CLINICAL REQUIREMENTS
Regulation by governmental authorities in the United States and in
countries abroad is expected to significantly impact Radiance's product
development, manufacturing, and marketing strategies. CVD expects that all of
Radiance's products will require regulatory approval by appropriate governmental
agencies prior to commercialization and will be subject to rigorous pre-clinical
and human clinical testing, and patient follow-up. Federal regulations control
the ongoing safety efficacy, manufacture, storage, labeling, record-keeping, and
marketing of all medical devices. The products will be subject to the regulatory
authorities of foreign countries in which they may be marketed. See the
discussion below in this Proposal No. 1, "BUSINESS OF CVD -- Government
Regulation."
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Pre-clinical in vitro biocompatibility (toxicity, hemocompatibility) will
be performed during the product development and manufacturing process
development phase. Animal studies and product testing will commence immediately
following completion of a suitable delivery system. Immediately following
completion of animal studies, it is anticipated that human clinical trials will
be initiated in Europe, and in parallel, an Investigational Device Exemption
("IDE") will be filed in the U.S. to develop the clinical data necessary to
support a subsequent Pre-Market Approval ("PMA") application. The PMA
application may require as many as 1,000 patients depending on indications with
at least one year follow-up. It is anticipated that both U.S. and European data
will be included, with at least 50% of such patients being from the U.S. In
conjunction with principal investigators, a standardized protocol will be
developed and closely monitored in order to ensure compliance with EN540, the
European Clinical Trials Standard, and to ensure acceptability of data to the
European Community. Data obtained in Europe is expected to focus on the ability
of the device to reduce restenosis in order to support the U.S. PMA application
and substantiate the safety and efficacy of the RDX Catheter in publications in
major medical journals.
In addition to providing clinical efficacy for regulatory approval of the
RDX Catheter, human clinical studies are expected to provide marketing data,
clinical utility for reimbursement agencies, and other publishable data which
should be useful in positioning Radiance and differentiating its products from
the competition. It is also expected that an application will be filed with the
Ministry of Health and Welfare in Japan. This procedure requires completion of
60-100 patients in two to three Japanese clinical investigation sites. The
Japanese approval process is expected to require approximately 18-24 months.
Because the RDX Catheter is expected to utilize radiation sources, its
manufacture, distribution, transportation import/export, use and disposal will
also be subject to federal, state and/or local laws and regulations relating to
the use and handling of radioactive materials. Specifically, after PMA approval
is obtained, approval by the U.S. Nuclear Regulatory Commission ("NRC"), or an
equivalent state agency, of Radiance's radiation sources for certain medical
uses will be required to commercially distribute the radiation sources to
licensed recipients in the U.S. In addition, Radiance and/or its supplier of
radiation sources must obtain a specific license from the NRC to commercially
distribute such radiation sources as well as comply with all applicable
regulations. Radiance and/or its supplier of radiation sources must also comply
with NRC and U.S. Department of Transportation regulations on the labeling and
packaging requirements for shipment of radiation sources to hospitals or other
users of the RDX Catheter. In addition, hospitals may be required to obtain or
expand their licenses to use and handle beta radiation prior to receiving
radiation sources for use in the RDX Catheter. Comparable radiation regulatory
requirements and/or approvals are anticipated in markets outside the U.S.
If any of the foregoing approvals are delayed significantly or not
obtained, Radiance's business, financial condition and results of operations
could be materially adversely affected.
COMPETITION
There are more than ten competing development programs in the area of
vascular radiotherapy. The major competitors include Novoste Corporation,
Johnson & Johnson, Guidant Corporation and United States Surgical Corporation.
Each of these competitors have significantly greater financial, marketing,
personnel and other resources compared to Radiance and CVD. There can be no
assurance that Radiance, or CVD, if the Merger is consummated can develop the
products or ongoing organization to compete with these larger competitors.
EMPLOYEES
As of November 30, 1998, Radiance had 11 employees working in the areas of
research and development, clinical and regulatory affairs and general
management. Radiance believes that the success of its business will depend, in
part, on its ability to attract and retain qualified personnel.
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PROPERTIES
Radiance currently subleases from CVD a 3,000 square foot facility in
Irvine, California, under a sublease agreement that expires in 2000.
LEGAL PROCEEDINGS
There currently are no material pending litigation proceedings to which
Radiance is a party or to which any of its property is subject.
MARKET FOR CAPITAL STOCK; DIVIDENDS
Radiance is a privately held company and there is no public market for its
capital stock. Radiance never has paid a cash dividend on its capital stock.
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BUSINESS OF CVD
INTRODUCTION
CVD designs, develops, manufactures and markets catheters and coronary
stent systems used to treat certain vascular diseases. CVD's catheters are used
in conjunction with angioplasty and vascular stenting. CVD's proprietary Focus
catheter technology enables physicians to deliver therapeutic radial force and
stents, accurately and effectively to the treatment site. CVD's proprietary
stent designs offer characteristics enabling physicians to access varying
coronary anatomy. CVD believes that these products enable physicians to perform
challenging interventional procedures effectively, resulting in improved
treatment outcomes and lower costs. CVD owns the rights to 27 issued U.S.
patents, one issued European patent and two Japanese patents covering certain
aspects of its catheter, vascular access and SEAL stent technologies.
Balloon angioplasty is used to widen narrowed arteries by passing a
catheter with a deflated balloon on its tip into the narrowed part of the
artery. When the balloon is inflated, the narrowed area is widened. However,
approximately one-quarter to one-third of patients who undergo balloon
angioplasty suffered renewed narrowing of the previously widened segment within
about six months of the procedure. This renewed narrowing is referred to as
"restenosis," or a reclosure of the vessel. In order to reduce restenosis, a
stent can be used to prop open an artery after angioplasty. The stent is
inserted by placing it over a balloon angioplasty catheter or other delivery
device and passing it to the narrowed part of the artery. The stent is then
expanded and locks into place to hold the artery open. However, restenosis also
has become a problem even when using stents due to tissue growth through the
mesh-like walls of the stent. See the discussion above in this Proposal No. 1,
"BUSINESS OF RADIANCE -- Restenosis."
CVD has utilized its core proprietary technologies to develop catheters and
stents that provide clinical advantages and cost benefits in the treatment of
vascular diseases. CVD's catheters and stents 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. CVD's patented Focus 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 deliver stents and perform interventional procedures
in vessels of varying diameters and anatomical locations.
CURRENT PRODUCTS
Catheter Products
CVD has utilized its Focus technology 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 treat vascular disease
cost-effectively. CVD's products are designed to be low profile (small,
uninflated diameter), enabling cardiologists to advance them along narrow
vessels, as well as flexible and trackable, enabling cardiologists to advance
and control them accurately within the vasculature.
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The following table lists CVD's currently marketed catheter products:
<TABLE>
<CAPTION>
FIRST
INTENDED COMMERCIAL
PRODUCTS APPLICATIONS U.S. REGULATORY STATUS SALE
-------- --------------------- ----------------------- ----------
<S> <C> <C> <C>
FOCUS CATHETERS
Guardian Over-the-wire design PTCA (i.e., balloon PMA Supplement Approved Q2 1998
angioplasty in
coronary arteries)
Lynx F/X Rail Design PTCA or Stent N/A(1) Q1 1997
Delivery(2)
ARC Over-the-wire design PTCA PMA Supplement Approved Q3 1996
FACT Catheter PTCA PMA Supplement Approved Q1 1996
</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 CVD to obtain a PMA
supplement approval. CVD is not currently seeking such approval.
Focus Catheters. CVD's Focus 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 Focus
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.
Stent Products
CVD's line of coronary integrated stent delivery systems provide physicians
with unique products of varying measures of strength and flexibility to allow
optimal placement and stenting characteristics to aid in the minimization of
restenosis.
The following table lists CVD's currently marketed stent products which are
not available in the United States due to CVD's decision not to apply for
regulatory approval.
<TABLE>
<CAPTION>
FIRST
PRODUCTS INTENDED APPLICATIONS COMMERCIAL SALE
-------- --------------------- ---------------
<S> <C> <C>
Synthesis Stent Coronary Stenting Q1 1998
Synthesis Star System(1) Coronary Stenting Q1 1998
Enforcer Stent Coronary Stenting Q3 1997
Enforcer Stent System Coronary Stenting Q4 1997
</TABLE>
- ---------------
(1) Pre-mounted stent on a Star balloon catheter delivery system.
In June 1998, CVD entered into a technology license agreement with Guidant
Corporation, an international interventional cardiology products company,
granting Guidant rights to manufacture and distribute products using CVD's Focus
technology for delivery of stents, including exclusive rights in the United
States. In exchange for those rights CVD has received, and will receive, certain
milestone payments based upon the transfer of the technological knowledge to
Guidant, and royalty payments based upon the sale of products by Guidant using
Focus technology.
Vascular Access Products
CVD has signed a letter of intent to sell the assets and operations of its
vascular access business unit to Escalon Medical Corp. CVD's vascular access
products utilize patented technology to provide rapid, accurate access to the
body's vascular system for guidewire and catheter entry. The sale is subject to
various closing conditions, including the negotiation and execution of a
definitive sale agreement. CVD believes that the sale
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of its vascular access business unit, combined with the Radiance merger, focuses
CVD's business on developing its proprietary technologies for the interventional
cardiology market.
NEW PRODUCT DEVELOPMENT AND TECHNOLOGY
CVD focuses its research and development efforts on utilizing CVD's
proprietary processes and patented technologies to develop cost-effective
products that address existing and emerging clinical demands.
CVD is developing its SEAL stent technology, which it believes is state of
the art technology for the treatment of restenosis. The SEAL stent is a unique
and new concept in vascular stenting which is designed to isolate the diseased
segment of the vessel wall from blood flow. The SEAL is self-expanding metallic
stent with a microporous surface for use as either a stent or a stent graft. By
developing metal foil of the proper thickness and strength, CVD believes it will
be able to form devices with low profiles, high expansion ratios and excellent
hoop strength, which are factors critical for successful device placement. Two
patents have been issued to date for this technology.
CVD believes that covering a high percentage of the diseased vessel wall
with a proprietary metal liner will result in a lower restenosis rate in
diseased vessels. The SEAL technology is presently being tested in animal
studies to determine its efficacy in large diameter coronary vessels and
saphenous vein grafts. If the animal studies are successful, CVD anticipates
commencing human clinical trials in Europe in the second quarter of 1999. CVD,
depending on the outcome of clinical trials, intends to promote the SEAL stent,
as an effective primary stent for the treatment and prevention of restenosis.
CVD has developed a proprietary delivery system to place accurately the SEAL
stent at the location of the diseased segment of the vessel wall. However, there
can be no assurance that the SEAL stent will perform in animal studies or
clinical trials, that CVD will complete the development of a new product
successfully, that CVD will be able to obtain FDA approval, or that the SEAL
stent ever will gain market acceptance.
CVD has developed proprietary material manufacturing processes used 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. CVD's Focus 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 Focus
catheter enlarges predictably at a rate of 0.1 mm 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 Focus
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. Many believe that vessel wall damage may lead to acute reclosure of the
vessel or restenosis.
CVD will be required to seek FDA approval for any new product and expects
that some of these products will be subject to the PMA process. There can be no
assurance that CVD will complete the development of any products successfully or
that any such products will receive any required regulatory approvals.
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 CVD has licensed to third parties, all of
CVD's products are produced in its facilities in Irvine, California. CVD
fabricates certain proprietary components, then assembles, inspects, tests and
packages all components into finished products. By designing and assembling its
catheter products, CVD believes it is better able to control quality and costs,
limit third-party access to its proprietary technology, and better manage
manufacturing process enhancements and new product introductions. In addition,
CVD 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 currently are performed by single vendors. While
CVD believes that there are other vendors available to perform these processes,
an interruption of performance by any of these vendors could have a
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material adverse effect on CVD's ability to manufacture its products until a new
source of supply were qualified and, as a result, could have a material adverse
effect on CVD's business, financial condition and results of operations.
CVD has obtained the right to affix the CE (Conformite Europeene) marking
to all of its products sold in all countries of the European Economic Area and
Switzerland. CE marking is a European symbol of conformance to strict product
manufacturing and quality system standards. As part of the CE marking process,
CVD also received ISO 9001/EN46001 certification with respect to the
manufacturing of all of its currently marketed products.
CVD's success will depend in part upon its ability to manufacture its
products in compliance with ISO 9001, the FDA's quality system regulations
("QSR") requirements, and 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. CVD began manufacturing certain of its products at its facilities in July
1995. Accordingly, CVD has limited experience in manufacturing its products. CVD
has undergone and expects to continue to undergo regular "QSR" inspections in
connection with the manufacture of its products at CVD's facilities. CVD's
success will depend upon, among other things, its ability to manage the
simultaneous manufacture of different products efficiently and to integrate the
manufacture of new products with existing products. There can be no assurance
that CVD 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. CVD's failure
to commence the manufacturing of these new products successfully, or to increase
production volumes of new and existing products in a timely manner, would
materially and adversely affect CVD'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, QSR requirements,
CDHS or other regulatory requirements could have a material adverse effect on
CVD's business, financial condition and results of operations.
MARKETING AND SALES
CVD's products are sold in the United States and international markets,
principally Europe and Japan. However, certain of CVD's products are not
available in each market due to regulatory and intellectual property
restrictions. CVD currently sells its products through a combination of
strategic partners, medical device distributors and direct sales personnel. CVD
also has distribution agreements with companies covering countries outside the
United States and Japan. CVD previously distributed certain products in Japan
through an exclusive distribution agreement with Fukuda, which the Company
terminated in April 1997. CVD subsequently entered into an exclusive
distribution agreement in Japan with Cathex in May 1997 which terminates in
January 2001. Sales of CVD's products to Fukuda accounted for 18%, 15% and 7% of
CVD's total product sales in 1995, 1996 and 1997, respectively. Sales to Cathex
in 1997 accounted for 13% of CVD's total product sales. In addition, sales to
Johnson & Johnson Interventional Systems ("JJIS") accounted for 12% of total
product sales in 1995, and sales to Medtronic accounted for 22% and 13% of total
product sales in 1996 and 1997, respectively. CVD intends to expand its sales
and marketing capability and to distribute selected new products through
strategic partnerships.
In 1995, 1996 and 1997, total export sales were $2,054,000, $3,514,000 and
$6,579,000, respectively, or approximately 59%, 42% and 58% respectively, of
total product sales. In 1995, 1996 and 1997 sales to Europe accounted for
$1,179,000, $1,614,000 and $3,020,000, respectively; sales to Japan represented
$744,000, $1,240,000 and $2,350,000, respectively; and sales to Latin America
represented $131,000, $243,000 and $253,000, respectively. CVD expects to
continue to derive significant revenue from international sales and therefore a
significant portion of CVD'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 CVD's ability to deliver products on a competitive and
timely basis. However, all of the Company's foreign sales are denominated in
dollars, except for sales in Germany by CVD Germany, which were immaterial to
the Company's business in 1997. Future imposition of, or significant increases
in the level of, customs duties, export quotas or other trade restrictions,
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<PAGE> 46
could have an adverse effect on CVD's business, financial condition and results
of operation. In foreign countries, CVD'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 CVD.
See Note 1 of Notes to Consolidated Financial Statements.
POST-MARKETING CLINICAL STUDIES
CVD has completed the clinical trials required for FDA approval of those
products which are marketed in the United States.
In a Comparative Performance and Pathological Study conducted at the
University of Texas Department of Medicine, CVD's FACT Focus catheter was
compared with conventional percutaneous transluminal coronary angioplasty
("PTCA") catheters from other leading manufacturers in an animal study. The
investigators concluded that the use of the Focus catheter resulted in reduced
arterial damage without reduction in catheter performance as determined by
catheter preparation, trackability, pushability, inflation/deflation and
angiographic visualization.
The Focus Lesion Expansion Optimizes Results Study ("FLEXOR Study")
compared Focus PTCA catheter with conventional PTCA catheters. The FLEXOR Study
evaluated the efficacy of Focus technology in improving clinical results
following angioplasty procedures. Success was evaluated based on the ability of
Focus technology to improve the minimal lumen diameter ("MLD") of the arterial
opening, and to reduce the number of catheters necessary for PTCA procedures.
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 commenced
in the fourth quarter of 1996 and was completed in the first quarter of 1997.
Results of the study were presented at the 1997 Transcatheter Therapeutics
symposium in Washington D.C. Data from this study of 80 patients demonstrated a
trend toward fewer balloons used per procedure with Focus technology, especially
when stent implantation was required, without any increase in complications.
Additionally, the Focus technology group of patients had a lower residual
stenosis than the conventional angioplasty group.
Certain of CVD's products which utilize Focus technology have received FDA
approval for PTCA and percutaneous transluminal angioplasty ("PTA") indications.
However, none of these products has received FDA approval for use in stent
delivery. An investigator-controlled study is currently testing CVD's Focus
technology with respect to stent implantation. The Optimal Stent Implantation
Study ("OSTI-2 Study") is evaluating the ability of stent delivery with Focus
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 Focus technology in each subgroup.
The OSTI-2 Study began in February 1996 and completed enrollment of patients in
the first quarter of 1998. Follow-up to this study is in progress. Preliminary
results of the study were reported at the American Heart Association Scientific
Sessions in November 1997 and additional results were reported at the American
College of Cardiology meeting in March 1998 and at American Heart Association
Scientific Sessions in November 1998. Early results demonstrate that Focus
technology facilitates achieving a larger in stent MLD following conventional
stent expansion techniques and also following optimal PTCA. These increased MLDs
were achieved without increased complication rates. In June 1998, CVD signed a
technology license agreement with Guidant Corporation, an international
interventional cardiology products company, granting Guidant rights to
manufacture and distribute products using CVD's Focus technology for delivery of
stents. See the discussion below in this section "Strategic Relationships."
CVD recently completed a clinical study in Europe of its proprietary
Synthesis(TM) coronary stent. The multicenter study enrolled 85 patients at four
centers in Germany. Procedural and 30 day follow-up results demonstrate a high
technical success rate with low complication and low major adverse event rates.
Six month clinical and angiographic follow-up is ongoing.
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STRATEGIC RELATIONSHIPS
CVD 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. In addition to
Radiance, CVD currently is a party to four such agreements, described below.
Guidant Corporation. In June 1998, CVD entered into a Technology License
Agreement with Guidant Corporation, an international interventional cardiology
products company, to grant them a license to manufacture and distribute products
using CVD's Focal Technology. Under the Agreement, CVD has received, and will
receive, certain milestone payments based upon the transfer of the technological
knowledge to Guidant, and royalty payments based upon the sale of products using
Focus technology by Guidant.
SCIMED Life Systems, Inc. CVD entered into a Stock Purchase and Technology
License Agreement, dated September 10, 1994, with SCIMED, now a unit of Boston
Scientific Corporation (the "SCIMED Agreement"). Pursuant to the SCIMED
Agreement, SCIMED purchased a 19% equity position in CVD, which is now diluted
to 5%. SCIMED also was granted an exclusive worldwide license to certain
combined site-specific solution delivery and coronary angioplasty technology in
exchange for license and royalty fees. The SCIMED Agreement may be terminated
(i) in the event of breach on 90 days notice by the non-breaching party; or (ii)
on 30 days notice in certain limited circumstances or (iii) by SCIMED upon 180
days notice.
Cathex Co., Ltd. CVD entered into a Distribution Agreement dated May 1,
1997 with Cathex Co., Ltd. ("Cathex"), whereby Cathex serves as CVD's exclusive
distributor for certain of CVD's products in Japan. In exchange for this
exclusive distributorship, certain Cathex shareholders agreed to purchase
$200,000 of CVD Common Stock (approximately 25,000 shares) and Cathex agreed to
purchase predetermined minimum quantities of CVD's products. The initial term of
the agreement expires on January 1, 2001 and is subject to a five-year
extension. The agreement may be terminated in the event of breach upon 90 days
notice by the non-breaching party, subject to cure within the notice period.
Endosonics Corporation. CVD has entered into a license agreement with
Endosonics Corporation ("EndoSonics"), dated December 22, 1995 (the "EndoSonics
Agreement"), in which CVD granted EndoSonics the non-exclusive, royalty-free
right to CVD's Focus technology for the development and sale of a combined
Focus/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. In February 1998, the FDA approved CVD's PMA
application and, as a result, CVD can obtain independent FDA supplemental
approvals on its products. The EndoSonics Agreement may be terminated in the
event of breach upon 60 days notice by the nonbreaching party, subject to the
breaching party's right to cure. In addition, in March of 1996, EndoSonics
purchased 400,000 shares of CVD's Series B Preferred Stock for a purchase price
of $8,000,000, which converted into 800,000 shares of Common Stock upon the
consummation of CVD's initial public offering on June 19, 1996. In February
1998, CVD repurchased 300,000 shares of its own common stock from Endosonics for
an aggregate price of $1,275,000.
PATENTS AND PROPRIETARY INFORMATION
CVD'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. CVD owns or has the rights to 27 issued U.S. patents, one issued
European patent and two Japanese patents covering certain aspects of its
catheter, vascular access and SEAL stent technologies. No assurance can be given
that any issued patents will provide competitive advantages for CVD's products,
or that they will not be challenged or circumvented by competitors.
The interventional cardiovascular market in general and the stent and
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. There can be no assurance that
CVD's products do not infringe such patents or rights. During 1997, CVD was sued
for trademark infringement
43
<PAGE> 48
regarding CVD's use of the product name "Lynx" in connection with one of CVD's
balloon angioplasty catheter product lines. CVD paid no monetary damages but
agreed to a consent judgment which prohibits CVD from using this name in the
United States. In the event that any such third-parties assert claims against
CVD for patent infringement and such patents are upheld as valid and
enforceable, CVD 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 CVD or that CVD 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 protect CVD's
foreign intellectual property rights adequately. CVD 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 CVD's trade secrets or proprietary technology will not
otherwise become known or be independently developed by competitors in such a
manner that CVD has no practical recourse. Litigation may be necessary to defend
against claims of infringement or invalidity, to enforce patents issued to CVD
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, CVD and its officers, which would have a material
adverse effect on its business, financial condition and results of operations.
COMPETITION
CVD 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. CVD believes it competes
favorably with respect to the foregoing factors. CVD 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 CVD's products could be rendered
obsolete as a result of future innovations. CVD's catheters, stents and other
products under development compete or will compete with catheters and stents
marketed by a number of manufacturers, including Guidant Corporation, Boston
Scientific Corporation, Johnson & Johnson, Medtronic, Inc., and Arterial
Vascular Engineering (which has recently entered into an agreement to be
acquired by Medtronic, Inc.). Such companies have significantly greater
financial, management and other resources, established market positions, and
significantly larger sales and marketing organizations than does CVD. CVD also
faces competition from manufacturers of other catheter-based atherectomy
devices, vascular stents and pharmaceutical products intended to treat vascular
disease. In addition, CVD believes that many of the purchasers and potential
purchasers of CVD's products prefer to purchase catheter and stent products from
a single source. Accordingly, many of CVD's competitors, because of their size
and range of product offerings, have a competitive advantage over CVD. There can
be no assurance that CVD's competitors will not succeed in developing or
marketing technologies and products that are more clinically or cost effective
than any that are being marketed or developed by CVD, or that such competitors
will not succeed in obtaining regulatory approval for introducing or
commercializing any such products prior to CVD.
THIRD-PARTY REIMBURSEMENT
In the United States, CVD'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
44
<PAGE> 49
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. Healthcare Finance 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
CVD'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 CVD's ability to sell
its products on a profitable basis. Failure by hospitals and other users of
CVD's products to obtain reimbursement from third-party payors, or changes in
government and private third-party payors' policies toward reimbursement for
procedures employing CVD's products, would have a material adverse effect on
CVD's business, financial condition and results of operations.
GOVERNMENT REGULATION
The manufacturing and marketing of CVD's products are subject to extensive
and rigorous government regulation in the United States and in other countries.
CVD believes success will depend significantly upon commercial sales of improved
versions of its catheter products. CVD will not be able to market these new
products in the United States unless and until CVD 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 application ("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 CVD'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 CVD's products, it
could act to withdraw approval or clearances of those products or request CVD
present additional data. Any such actions would have a material adverse effect
on CVD's business, financial condition and results of operations.
If substantial equivalence cannot be established, or if the FDA determines
the device or the particular application for the device requires a more rigorous
review to assure safety and effectiveness, the FDA will require the manufacturer
to submit a PMA which 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. CVD
expects that certain of it's products under development will be subject to this
PMA process.
CVD is 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,
CVD is inspected on a routine basis by both the FDA and the CDHS for compliance
with QSR regulations. These regulations require that CVD manufacture its
products and maintain related documentation in a prescribed manner with respect
to manufacturing, testing and control activities. CVD has undergone and expects
to continue to undergo regular QSR inspections in connection with the
manufacture of its products at CVD's facilities. Further, CVD is required to
comply with various FDA requirements for labeling. The Medical Device Reporting
laws and regulations require CVD to 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 and ARC catheters, which utilize the
FOCUS technology, for coronary balloon angioplasty. These catheters are marketed
outside the
45
<PAGE> 50
United States for use in stent deployment. However, without specific FDA
approval for stent deployment, these catheters may not be marketed by CVD 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 CVD'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 CVD's business,
financial condition and results of operations.
CVD also is 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 predicted
accurately. Failure to comply with regulatory requirements could have a material
adverse effect on CVD's business, financial condition and results of operations.
International sales of CVD's products are subject to the regulatory
requirements in many countries. The regulatory review process varies from
country to country and may in some cases require the submission of clinical
data. CVD 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 which require a
PMA but are not yet approved domestically.
In order to sell its products within the European Economic Area and
Switzerland, CVD must achieve compliance with the requirements of the Medical
Devices Directive ("MDD") and affix CE marking on its products to attest to such
compliance. To achieve compliance, CVD's products must meet the "Essential
Requirements" of the MDD relating to safety and performance and CVD must
successfully undergo verification of its regulatory compliance ("conformity
assessment") by a Notified Body selected by CVD. CVD has selected TUV Product
Service of Munich, Germany as its Notified Body. The level of scrutiny of such
assessment depends on the regulatory class of the product, and many of CVD's
coronary products are currently in Class III, the highest risk class, and
therefore subject to the most rigorous controls.
In December 1996, CVD received ISO 9001/EN46001 certification from its
Notified Body with respect to the manufacturing of all of its products in its
Irvine facilities. CVD's contracted manufacturing facility in The Netherlands
received such certification in 1993. This certification demonstrates that CVD
manufactures its products in accordance with certain international quality
requirements. A manufacturer must receive ISO 9001/EN46001 certification prior
to applying for CE marking of specific products. In January 1998, CVD obtained
the right to affix CE marking to all of its products currently sold in all
countries of the European Economic Area and Switzerland. CVD is subject to
continued supervision by its Notified Body and will be required to report any
serious adverse incidents to the appropriate authorities. CVD also must comply
with additional requirements of individual nations. Failure to maintain
compliance required for CE marking could have a material adverse effect upon
CVD's business, financial condition and results of operations. There can be no
assurance CVD will be able to achieve or maintain such compliance on all or any
of its products or that it will be able to produce its products timely and
profitably while complying with the MDD and other regulatory requirements.
PRODUCT LIABILITY
CVD faces the risk of financial exposure to product liability claims. CVD'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. CVD is currently covered under a product liability insurance policy with
coverage limits of $10.0 million per occurrence and $10.0 million per year in
the aggregate. There can be no assurance that CVD's product liability insurance
is adequate or that such insurance coverage will remain available at acceptable
costs. There can be no assurance that CVD will not incur significant product
liability claims in the future. A successful claim
46
<PAGE> 51
brought against CVD in excess of its insurance coverage could have a material
adverse effect on CVD's business, financial condition and results of operations.
Additionally, adverse product liability actions could negatively affect the
reputation and sales of CVD's products and CVD's ability to obtain and maintain
regulatory approval for its products, as well as substantially divert the time
and effort of management away from CVD's operations.
EMPLOYEES
As of November 30, 1998, CVD had 99 employees, including 49 in
manufacturing, 20 in research, development and regulatory affairs, 19 in sales
and marketing and 11 in administration. CVD believes that the success of its
business will depend, in part, on its ability to attract and retain qualified
personnel. CVD believes it has good relations with its employees.
RESEARCH AND DEVELOPMENT
Expenditures for research and development amounted to $5,038,000 for the
first nine months of fiscal year 1998, $7,041,000 in fiscal 1997, $3,582,000 in
fiscal 1996 and $1,683,000 in fiscal 1995.
PROPERTIES
Currently, CVD leases facilities aggregating approximately 28,000 square
feet in Irvine, California under various lease agreements, most of which expire
beginning in 2001. CVD also leases approximately 2,700 square feet in Koln,
Germany expiring in April 2003. CVD believes that its facilities are adequate to
meet its requirements through mid-1999.
LEGAL PROCEEDINGS
CVD is a party to ordinary disputes arising in the normal course of
business. Management is of the opinion that the outcome of these matters will
not have a material adverse effect on CVD's consolidated financial position.
47
<PAGE> 52
SELECTED HISTORICAL AND PRO FORMA FINANCIAL INFORMATION
CARDIOVASCULAR DYNAMICS, INC. SELECTED HISTORICAL FINANCIAL DATA
The selected historical financial data for CVD set forth below has been
derived from and should be read in conjunction with the audited financial
statements for the years ended December 31, 1993, 1994, 1995, 1996 and 1997, and
the unaudited financial statements for the nine months ended September 30, 1997
and 1998.
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30,
------------------------------------------------- -------------------
1993(1) 1994 1995 1996 1997 1997 1998
------- ------- ------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement of Operations
Data:
Revenue:
Sales............................... $ 126 $ 1,169 $ 3,462 $ 8,384 $ 11,332 $ 8,943 $ 7,031
License fee and other(2)............ -- 1,000 -- 150 -- -- 1,605
Contract............................ -- 220 641 200 -- -- --
------- ------- ------- -------- -------- -------- --------
Total revenue................ 126 2,389 4,103 8,734 11,332 8,943 8,636
Costs and expenses:
Cost of sales....................... 79 848 2,051 4,111 6,418 4,392 4,339
Charge for acquired in-process
R&D(3)............................ 2,001 -- 488 2,133 -- -- --
Research and development............ 734 1,228 1,683 3,582 7,041 3,507 5,038
Marketing and sales................. 94 748 1,526 3,358 6,691 4,838 3,801
General and administrative.......... 96 587 1,331 1,548 2,179 1,265 1,855
Minority interest................... -- -- -- -- -- -- (68)
------- ------- ------- -------- -------- -------- --------
Total operating costs and
expenses................... 3,004 3,411 7,079 14,732 22,329 14,002 14,965
------- ------- ------- -------- -------- -------- --------
Loss from operations.................. (2,878) (1,022) (2,976) (5,998) (10,997) (5,059) (6,329)
Other income.......................... 29 51 102 1,374 2,225 1,806 1,136
------- ------- ------- -------- -------- -------- --------
Net loss.............................. $(2,849) $ (971) $(2,874) $ (4,624) $ (8,772) $ (3,253) $ (5,193)
======= ======= ======= ======== ======== ======== ========
Basic and diluted net loss per share
(pro forma through June 1996)(4).... $ (0.28) $ (0.71) $ (0.69) $ (0.96) $ (0.36) $ (0.59)
======= ======= ======== ======== ======== ========
Shares used in computing basic and
diluted net loss per share(pro forma
through June 1996) (4).............. 3,487 4,052 6,755 9,118 9,098 8,857
======= ======= ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------------- -------------------
1993 1994 1995 1996 1997 1997 1998
------- ------- ------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents........... $ 547 $ 3,379 $ 1,568 $ 17,192 $ 6,141 $ 1,792 $ 3,627
Marketable securities
available-for-sale................ 25,733 24,773 32,869 23,301
Working capital (deficit)........... (75) 1,366 (774) 46,142 33,828 40,242 28,557
Total assets................. 690 4,340 4,002 50,084 41,361 46,385 36,292
Convertible obligation.............. 750
Accumulated deficit................. (2,580) (3,551) (6,425) (11,049) (19,821) (14,302) (25,014)
Total stockholders' equity
(net capital deficiency)... $ (241) $ 1,288 $(1,098) $ 47,623 $ 37,873 $ 44,157 $ 31,850
</TABLE>
- ---------------
(1) The period from January 1, 1993 to June 9, 1993 reflects the operations of
the predecessor to the Company. See Note 1 of Notes to Consolidated
Financial Statements.
(2) The revenue for 1994 was received from a related party, SCIMED. See Note 3
of Notes to Consolidated Statements.
(3) The charge for acquired in-process research and development reflects a
change in the basis of CVD's assets and liabilities as a result of the
acquisition by EndoSonics which has been allocated to CVD for the years
ended December 31, 1993 and 1995 and the excess of the purchase price for
Intraluminal Devices,
48
<PAGE> 53
Inc. and the associated acquisition expenses for the year ended December 31,
1996. See Notes 1 and 2 of Notes to Consolidated Financial Statements.
(4) The per share amounts prior to 1997 have been restated to comply with
Statement of Financial Accounting Standard No. 128, Earnings Per Share. See
Note 1 of Notes to Consolidated Financial Statements.
RADIANCE MEDICAL SYSTEMS, INC. SELECTED HISTORICAL FINANCIAL DATA
The selected historical financial data for Radiance set forth below has
been derived from and should be read in conjunction with the audited financial
statements for the year ended December 31, 1997, and the unaudited financial
statements for nine months ended September 30, 1998 set forth elsewhere herein.
Radiance, a development stage company, began operations in August 1997.
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------ -----------------
(IN THOUSANDS)
<S> <C> <C>
Statement of Operations Data:
Operating expenses:
Research and development.................................. $ 132 $ 1,025
General and administrative................................ 18 45
----- -------
Total operating costs and expenses................ 150 1,070
----- -------
Loss from operations...................................... (150) (1,070)
Other income.............................................. 19 44
----- -------
Net loss.................................................. $(131) $(1,026)
===== =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------ -------------
(IN THOUSANDS)
<S> <C> <C>
Balance Sheet Data:
Cash and cash equivalents................................. $1,422 $ 2,407
Working capital........................................... 1,350 2,190
Total assets...................................... 1,455 2,466
Accumulated deficit....................................... (131) (1,157)
Total stockholder's equity........................ $1,365 $ 1,816
</TABLE>
UNAUDITED PRO FORMA CONDENSED COMBINED SELECTED FINANCIAL INFORMATION
The unaudited pro forma condensed combined financial information is
provided for informational purposes only and does not purport to be indicative
of the future results of financial position of Cardiovascular Dynamics, Inc. or
what the results of operation or financial position would have been had the
acquisition been effected on the dated indicated. The information should be read
in conjunction with the audited financial statements of both organizations
incorporated by reference in this Proxy Statement.
49
<PAGE> 54
The unaudited pro forma condensed combined selected financial information
of Cardiovascular Dynamics, Inc., Radiance and Clinitec GmbH ("Clinitec") set
forth below gives effect to the Radiance and Clinitec acquisitions under the
purchase accounting method, as if the acquisition had occurred as of August 15,
1997 and January 1, 1998 for Radiance and as of January 1, 1997 for Clinitec for
the pro forma condensed combined statements of operations for the periods ended
December 31, 1997 and September 30, 1998, respectively, and as of September 30,
1998, for the pro forma condensed combined balance sheet.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
CVD RADIANCE CLINITEC PRO FORMA
ACTUAL(A) ACTUAL(B) ACTUAL(C) ADJUSTMENTS PRO FORMA
--------- --------- ---------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Consolidated Statement of Operations Date:
Revenue:
Sales................................... $ 11,332 $ -- $ 301 $ -- $ 11,633
Costs and expenses:
Cost of sales........................... 6,418 -- 560 6,978
Research and development................ 7,041 132 -- 320(1) 7,493
Marketing and sales..................... 6,691 -- 442 -- 7,133
General and administrative.............. 2,179 18 -- -- 2,197
-------- ----- ------- ------ --------
Total operating costs and
expenses...................... 22,329 150 1,002 320 23,801
-------- ----- ------- ------ --------
Loss from operations...................... (10,997) (150) (701) (320) (12,168)
Other income.............................. 2,225 19 -- (59)(2) 2,185
-------- ----- ------- ------ --------
Net loss.................................. $ (8,772) $(131) $ (701) $ (379) $ (9,983)
======== ===== ======= ====== ========
Basic and diluted net loss per share(3)... $ (0.96) $ (1.02)
======== ========
Shares used in computing basic and diluted
net loss per share(3)................... 9,118 9,765
======== ========
</TABLE>
- ---------------
(a) Although not reflected in this pro forma statement, at the date of the
merger, $3,886 will be expensed for in-process research and development. The
amounts are subject to adjustment based on the completion of an independent
appraisal.
(b) Radiance Medical Systems, Inc., a development stage company, began
operations in August 1997.
(c) On July 29, 1997, CVD acquired all of the Common Stock of its independent
distributor in Germany, Clinitec. In order to present pro forma operating
results as if Clinitec and CVD's operations were combined at the beginning
of the year ended December 31, 1997, the operating results for the seven
months before the acquisition date are included.
(1) To reflect amortization of developed technology and identified intangible
assets using lives of 3 to 7 years.
(2) To reflect reduction of interest income from cash portion of acquisition
consideration of $2,445 and acquisition costs of $400 at an average rate of
5.5% per annum.
(3) To reflect an increase in the weighted average shares outstanding assuming
70% of acquisition consideration is paid using CVD common stock at an
assumed average price of $3.33 per share:
<TABLE>
<C> <S>
9,118 CVD shares used in computing basic and diluted net loss per
share.
648 Shares to RMS shareholders, assuming an August 1997
acquisition date.
-----
9,765 Pro forma shares used in computing pro forma basic and
diluted net loss per share.
=====
</TABLE>
50
<PAGE> 55
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
CVD RADIANCE PRO FORMA
ACTUAL(A) ACTUAL(B) ADJUSTMENTS PRO FORMA
--------- --------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Consolidated Statement of Operations Date:
Revenue:
Sales........................................... $ 7,031 $ -- $ -- $ 7,031
License fee and other........................... 1,605 -- -- 1,605
------- ------- ----- -------
Total revenue........................... 8,636 -- -- 8,636
Costs and expenses:
Cost of sales................................... 4,339 -- -- 4,339
Research and development........................ 5,038 1,025 498(1)(2) 6,561
Marketing and sales............................. 3,801 -- -- 3,801
General and administrative...................... 1,855 45 -- 1,900
Minority interest............................... (68) -- 68(2) --
------- ------- ----- -------
Total operating costs and expenses...... 14,965 1,070 566 16,601
------- ------- ----- -------
Loss from operations.............................. (6,329) (1,070) (566) (7,965)
Other income...................................... 1,136 44 (117)(3) 1,063
------- ------- ----- -------
Net loss.......................................... $(5,193) $(1,026) $(683) $(6,902)
======= ======= ===== =======
Basic and diluted net loss per share(4)........... $ (0.59) $ (0.65)
======= =======
Shares used in computing basic and diluted net
loss per share(4)............................... 8,857 10,570
======= =======
</TABLE>
- ---------------
(a) Although not reflected in this pro forma statement, at the date of the
merger, $3,886 will be expensed for in-process research and development. The
amounts are subject to adjustment based on the completion of an independent
appraisal.
(b) Radiance Medical Systems, Inc., a development stage company, began
operations in August 1997.
(1) To reflect amortization of developed research and development and related
costs with a 3 to 7 year life.
(2) To reverse entries to record to CVD's share of Radiance operating results at
September 10, 1998, which consisted of $136 of research and development
expenses and $68 in minority interests share of losses.
(3) To reflect reduction of interest income from cash portion of acquisition
consideration of $2,445 and acquisition costs of $400 at an average rate of
5.5% per annum.
(4) To reflect an increase in the weighted average shares outstanding assuming
70% of acquisition consideration is paid using CVD common stock at an
assumed average price of $3.33 per share:
<TABLE>
<C> <S>
8,857 CVD shares used in computing basic and diluted net loss per
share.
1,713 Shares to RMS shareholders, assuming an August 1997
acquisition date.
- ------
10,570 Pro forma shares used in computing pro forma basic and
diluted net loss per share.
======
</TABLE>
51
<PAGE> 56
PRO FORMA CONDENSED COMBINED CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
CVD PRO FORMA
ACTUAL(A) ADJUSTMENTS PRO FORMA
--------- ----------- ---------
<S> <C> <C> <C>
ASSETS:
Cash and cash equivalents................................ $ 3,627 $ -- $ 3,627
Marketable securities.................................... 23,301 (2,845)(1) 20,456
Other current assets..................................... 5,161 5,161
------- ------- --------
32,089 -- 29,244
Property and equipment, net................................ 1,537 -- 1,537
Goodwill and other required intangibles, net............... 2,288 3,819(1) 6,107
Other assets............................................... 378 -- 378
------- ------- --------
Total assets..................................... $36,292 $ 974 $ 37,266
======= ======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities........................................ $ 3,532 $ -- $ 3,532
Minority interest.......................................... 910 (910)(1) --
Stockholders' equity:
Common stock............................................. 10 2(1) 12
Additional paid-in capital............................... 60,679 5,768(1) 66,447
Accumulated deficit...................................... (25,014) (3,886)(1) (28,900)
Other stockholders' equity............................... (3,825) -- (3,825)
------- ------- --------
Total stockholder's equity....................... 31,850 1,884 33,734
------- ------- --------
Total liabilities and stockholder's equity....... $36,292 $ 974 $ 37,266
======= ======= ========
</TABLE>
- ---------------
(a) The accounts of Radiance are included in the consolidated balance sheet of
CVD at September 30, 1998.
(1) The total purchase price for the shares of Radiance Preferred Stock and
Radiance Common Stock not owned by CVD is dependent upon the trading price
of CVD's Common Stock for the twenty-day period before the merger closes;
additionally, the portion of the consideration to be paid in cash may vary
from none to 30% at CVD's election. Accordingly, the estimate of the total
purchase price used in the accompanying pro forma condensed combined
consolidated balance sheet and its composition is preliminary and subject to
change based upon the resolution of these contingencies. Using a CVD Common
Stock value of $3.33 per share and 30% and 70% cash and Common stock
consideration mix, the total purchase price for all of the shares of
Radiance Preferred Stock and Radiance Common Stock not owned by CVD at
September 30, 1998 is estimated to be $8,615, which, for purposes of
preparing the pro forma adjustments, is assumed to be paid $2,445 in cash
and $5,770 by the issuance of 1,713,395 shares of CVD Common Stock. Included
in these amounts are shares of CVD Common Stock issuable for outstanding
options for Radiance Common Stock, which under the Merger Agreement fully
vest upon the closing of the transaction. Lastly, CVD expects to incur
approximately $400 of direct transaction costs that are also treated as part
of the purchase price.
The estimated total purchase price has been allocated as follows:
<TABLE>
<S> <C>
Book value of minority interest in Radiance................. $ 910
Estimated fair value of developed technology and related
intangible assets......................................... 3,106
Estimated fair value of acquired in-process research and
development............................................... 3,886
Covenant not to compete..................................... 1,205
Reclassify amounts assigned to goodwill for previous
purchases of Radiance Preferred Stock..................... (492)
------
Estimated total purchase price.............................. $8,615
======
</TABLE>
Amounts allocated to developed technology and related intangible assets and
to acquired in-process research and development are based upon the
preliminary conclusions of an independent appraisal. There may be changes
to this allocation when the final appraisal is obtained.
52
<PAGE> 57
CVD MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
CVD designs, develops, manufactures and markets catheters and coronary
stent systems used to treat certain vascular diseases. CVD's catheters are used
in conjunction with angioplasty and vascular stenting. CVD's proprietary Focus
catheter technology enables physicians to deliver therapeutic radial force and
stents, accurately and effectively to the treatment site. CVD's proprietary
stent designs offer characteristics enabling physicians to access many different
coronary anatomy. CVD believes that these products enable physicians to perform
challenging interventional procedures effectively, resulting in improved
treatment outcomes and lower costs. CVD owns the rights to 27 issued U.S.
patents, one issued European patent and two Japanese patents covering certain
aspects of its catheter, vascular access and SEAL stent technologies. To date,
the majority of CVD'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, CVD's
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 March 1996,
EndoSonics purchased 400,000 shares of CVD's Series B Preferred Stock for a
purchase price of $8.0 million, which converted into 800,000 shares of Common
Stock upon the consummation of the initial public offering.
In September 1994, CVD and SCIMED, now a unit of Boston Scientific
Corporation, 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 December 31, 1996 CVD had received in the aggregate
approximately $2.2 million in license fees, research and development funding and
technical assistance from SCIMED under this agreement. CVD received no revenues
from SCIMED January 1, 1997 through September 30, 1998. In 1994, SCIMED
purchased a 19% equity position in CVD for a purchase price of $2.5 million. In
August 1997, SCIMED exercised warrants to purchase 120,000 shares of CVD's
Common Stock at a price of $3.29 per share. See "BUSINESS OF CVD -- Strategic
Relationships."
In January 1995, CVD and ACS, subsequently purchased by Guidant
Corporation, entered into an agreement pursuant to which CVD 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 December 31, 1996, CVD had received approximately
$0.35 million in milestone payments under the ACS Agreements. CVD received no
payments during 1997. In February 1998, ACS exercised its right to terminate the
perfusion technology Agreement. See "BUSINESS OF CVD -- Strategic
Relationships."
53
<PAGE> 58
CVD currently sells its products through a combination of medical device
distributors and a limited number of direct sales personnel. CVD is a party to
three agreements for the U.S. distribution of products incorporating its Focus
technology. CVD distributed certain products in Japan through an exclusive
distribution agreement with Fukuda which was terminated and replaced by CVD in
May 1997 with a similar agreement with Cathex. CVD also has distribution
agreements with 30 companies covering 35 countries outside the United States and
Japan. See "BUSINESS OF CVD -- Strategic Relationships."
On July 15, 1996, CVD entered into co-distribution agreements with
Medtronic, providing for the co-distribution of CVD's FACT, CAT and ARC balloon
angioplasty catheters. Under the terms of these agreements, Medtronic purchased
a minimum number of angioplasty catheters manufactured by CVD for distribution
worldwide for a period of up to three years. Specific products to be distributed
by Medtronic would differ in individual country markets. The initial term of the
Medtronic agreements was for a period of three years from the date of first
delivery of a product. In May 1997, Medtronic advised CVD of its election to not
make minimum purchases of product for the second year of the agreement. In June
1997, Medtronic informed CVD that it would not fulfill its commitment for the
first year of the agreement and that it did not believe it was required to
fulfill such commitment. This dispute adversely affected CVD's financial results
for the second half of 1997 and first half of 1998 in that Medtronic did not
fulfill its commitment to purchase an additional $1.3 million in products and
did not elect to fulfill its commitment for the second year of the agreement.
In June 1998, CVD entered into a technology license agreement with Guidant
Corporation, an international interventional cardiology products company,
granting Guidant rights to manufacture and distribute products using CVD's Focus
technology for delivery of stents, including exclusive rights in the United
States. In exchange for those rights CVD has received, and will receive, certain
milestone payments based upon the transfer of the technological knowledge to
Guidant, and royalty payments based upon the sale of products by Guidant using
Focus technology.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996 AND DECEMBER 31, 1997
Sales Revenue. Sales revenue increased to $11.3 million in 1997 from $8.4
million in 1996, representing an increase of 35%. The increase resulted
primarily from increased sales of CVD's Focus catheters, and, to a lesser
extent, the introduction of new coronary stent products. Sales of products
through Medtronic under CVD's co-exclusive distribution agreement and sales of
products in Japan through CVD's exclusive distribution relationships with Fukuda
and Cathex accounted for 7% and 13%, respectively, of total product sales in
1997. The Agreements with Medtronic and Fukuda were terminated in 1997.
License Fee and Other Revenue. There were no license fees nor other
revenues from ACS in 1997, compared with $0.2 million in 1996. In February of
1998, ACS elected to terminate the technology license agreement with CVD.
Contract Revenue. There were no contract revenues from SCIMED in 1997,
compared with $0.2 million in 1996. See "BUSINESS OF CVD -- Strategic
Relationships."
Cost of Sales. Cost of sales increased to $6.4 million in 1997 from $4.1
million in 1996. This increase resulted primarily from increased manufacturing
volumes related to increased product sales and reserves and allowances of $1.0
million for excess product inventories.
Charge for Acquired In-process Research and Development. CVD incurred a
charge of $2.1 million in 1996 in connection with the acquisition of
Intraluminal Devices, Inc. ("IDI"). The excess of the purchase price of IDI 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 IDI was in the development stage and had not yet
received regulatory approval for any of its products at the time of the
acquisition. There were no similar charges in 1997.
54
<PAGE> 59
Research and Development. Research and development increased to $7.0
million in 1997 compared to $3.6 million in 1996, representing an increase of
97%. This increase resulted primarily from expenditures on the development of
Focus technology, vascular stents and vascular access products. CVD believes 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 $6.7 million
in 1996 from $3.4 million in 1996, representing an increase of 99%. This
increase resulted mainly from the expansion of CVD's direct sales force in the
United States and marketing expenses related to the product launch of the
coronary stent products in foreign markets. CVD expects to expand and expects
expenses associated with these activities to increase in the future as it
expands.
General and Administrative. General and administrative expenses increased
to $2.2 million in 1997 from $1.5 million in 1996, representing an increase of
41%. The added costs were primarily due to additions in administrative staff and
the added costs of operating as a public company for an entire year. CVD began
trading as a public company on June 20, 1996.
Other Income. Other income, principally interest income, increased to $2.2
million in 1997 from $1.3 million in 1996. The 66% increase resulted from the
investment of the net proceeds of CVD's initial public offering for the entire
year of 1997.
YEARS ENDED DECEMBER 31, 1995 AND DECEMBER 31, 1996
Sales Revenue. Sales revenue increased to $8.4 million in 1996 from $3.5
million in 1995, representing an increase of 140%. The increase resulted
primarily from increased sales of CVD's Focus catheters, and, to a lesser
extent, the introduction of new products. Sales of products through Medtronic
under CVD's co-exclusive distribution agreement and sales of products in Japan
through CVD's exclusive distribution relationship with Fukuda accounted for 22%
and 15%, respectively, of total product sales in 1996.
License Fee and Other Revenue. License fee and other revenue from ACS
remained constant at $0.2 million in both 1996 and 1995.
Contract Revenues. Contract Revenue was $0.2 million in 1996 and $0.6 in
1995. This decrease stemmed from reduced technology development and other
support from SCIMED. See "BUSINESS OF CVD -- Strategic Relationships."
Cost of Sales. Cost of sales increased to $4.1 million in 1996 from $2.1
million in 1995. This increase resulted primarily from increased manufacturing
volumes related to increased product sales. In July 1995, CVD transferred its
product manufacturing from EndoSonics' facility to CVD's facility in Irvine,
California.
Charge for Acquired In-process Research and Development. CVD incurred a
charge of $2.1 million in 1996 in connection with the acquisition of
Intraluminal Devices, Inc. ("IDI"). The excess of the purchase price of IDI 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 IDI 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 increased to $3.6
million in 1996 compared to $1.7 million in 1995, representing an increase of
112%. This increase resulted primarily from expenditures on the development of
vascular access and Focus technology products. CVD believes 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 $3.4 million
in 1996 from $1.5 million in 1995, representing an increase of 127%. This
increase resulted mainly from the expansion of CVD's direct sales force in the
United States and marketing expenses related to the product launch of the FACT
and ARC catheters. CVD expects to expand and expects expenses associated with
these activities to increase in the future as it expands.
55
<PAGE> 60
General and Administrative. General and administrative expenses increased
to $1.5 million in 1996 from $1.3 million in 1995, representing an increase of
15%. The added costs were primarily due to additions in administrative staff and
the added costs of operating as a public company.
Other Income. Other income, principally interest income, increased to $1.3
million in 1996 from $0.1 million in 1995. The increase resulted from the
investment of the net proceeds of CVD's initial public offering which amounted
to approximately $42.8 million.
NINE MONTH PERIODS ENDING SEPTEMBER 30, 1997 AND SEPTEMBER 30, 1998
Revenue. Revenue for the first nine months of 1998 decreased 3% to $8.6
million compared to $8.9 million for the same period of 1997. The revenue
decrease was primarily due to the change in product revenues, which decreased
21% to $7.0 million in the first nine months of 1998 compared to $8.9 million
for the same period in 1997. The decrease resulted primarily from sales to one
large former international distributor of approximately $1.5 million made in the
first nine months of 1997. Revenue for the first nine months of 1998 included
$1.6 million from certain product licensing fees paid by Guidant Corporation.
Gross Profit Percentage. The gross profit percentage for the first nine
months of 1998 decreased to 50% compared to 51% for the same period of 1997.
Although revenue for the first nine months of 1998 included $1.6 million from
licensing fees that had no associated cost of sales, the gross profit percentage
decreased, compared with the same period of 1997, primarily due to increases in
the Company's provision for inventory obsolescence.
Research and Development. Research, development and clinical expenses
increased by 44% to $5.0 million in the nine-month period ended September 30,
1998 from $3.5 million in the same period ended September 30, 1997. The primary
reason for this increase was additional spending on development of the Company's
new SEAL technology stent products and increased spending on clinical trials for
these products.
Marketing and Sales. Marketing and sales expenses declined 21% to $3.8
million, from $4.8 million in the nine month period ended September 30, 1997.
This decrease primarily reflects reductions in the Company's domestic sales
force and related expenses.
General and Administrative. General and administrative expenses increased
by 47% to $1.9 million for the nine months ended September 30, 1998 from $1.3
million for the same period in 1997. The increase was due primarily to additions
to the allowance for uncollectible accounts receivable and the salary expense of
an additional executive officer.
Other Income. Interest income declined to $1.2 million in the first nine
months of 1998 compared with $1.7 million in the same period of 1997. The
decrease was due to a reduction of $10.6 million in cash and cash equivalents
and marketable securities since September 30, 1997, excluding the cash of
Radiance, due to the use of funds for operations, the purchase of treasury stock
and capital expenditures.
CVD has experienced an operating loss for each of the last three years and
expects to continue to incur operating losses through at least 1998. CVD's
results of operations have varied significantly from quarter to quarter.
Quarterly operating results 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 fluctuation 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.
56
<PAGE> 61
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, CVD has financed its operations primarily through the
sale of its equity securities. Prior to CVD's initial public offering on June
19, 1996, CVD had raised approximately $11.4 million from the private sales of
preferred and common stock and $2.7 million in working capital advances from
EndoSonics Corporation, formerly the parent corporation of CVD, CVD repaid
EndoSonics Corporation during the third quarter of 1996. In the third quarter of
1996, CVD closed its initial public offering of common stock, resulting in net
proceeds of $42.8 million after deducting underwriting discounts and commissions
and other expenses of the offering. For the years ended December 31, 1997, 1996
and 1995, CVD's net cash used in operating activities was $9.8, $5.8 million and
$2.1 million, respectively. These increases were primarily due to funding of
operating losses and the charges for acquired in-process research and
development.
On June 19, 1996, CVD closed its initial public offering, which consisted
of the sale of 3,400,000 shares of common stock at $12.00 per share. On July 17,
1996, CVD's underwriters exercised their overallotment option to purchase an
additional 510,000 shares of common stock at $12.00 per share. CVD received net
offering proceeds from the sale of common stock of approximately $42.8 million
after deducting underwriting discounts and commissions and other expenses of the
offering.
On September 30, 1998, CVD had cash, cash equivalents and marketable
securities available for sale of $26.9 million. Net cash used in operating
activities was $3.4 million for the first nine months of 1998 as compared to
$7.2 million for the same period of 1997. CVD 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. CVD anticipates that its existing capital resources
will sufficient to fund its operations at least through the second quarter of
2000. If the anticipated acquisition of Radiance is consummated, the amount of
capital resources expended, especially for clinical tests and research and
development, will be substantial, and CVD may not be able to fund its operations
from its existing capital resources beyond the second quarter of 2000. The
timing and extent of expenditures for the research and development and testing
of Radiance technology will be dependent upon many variables, including but not
limited to the success of the research and development and clinical testing
process, changes in the competitive environment, internal resource allocations
and external resource availability. CVD's future capital requirements will
depend on many factors, including its 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. CVD 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, CVD 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 CVD to grant rights to certain
technologies or products that CVD would not otherwise grant.
YEAR 2000
CVD has completed an assessment, has upgraded, and must upgrade portions of
its hardware and software so that its computer systems will function properly
with respect to dates in the year 2000 and thereafter. Of the total Year 2000
project cost estimated at $15,000, approximately $5,000 has been expended and
future expenditures for upgrades and other project costs are not expected to
exceed said estimate by a material amount. The project is estimated to be
completed not later than December 31, 1998, which is prior to any anticipated
impact on the operating systems.
In addressing the Year 2000 Issue, CVD will also be contacting its vendors
and customers to assess the impact that they will have on CVD's operations and
whether CVD will be able to meet their needs. Based upon our assessment of CVD's
systems and software, CVD's believes that the planned system enhancements and
upgrades should prevent related problems that could affect its ability to supply
or service its customers. However, there can be no assurance that all of CVD's
systems and software will be Year 2000 ready.
57
<PAGE> 62
There is also no assurance that its vendor's systems and software will be
Year 2000 ready. In an effort to prepare for any vendor problems CVD will be
attempting to identify alternative supply sources. However, there can be no
assurance that the alternative sources will be Year 2000 ready or be able to
provide the same level of service and supply as current vendors. Even if the
project to be Year 2000 ready is completed by the end of 1998, there can be no
assurance that such plans will be sufficient to address any third party failures
or that unresolved or undetected internal and external Year 200 issues will not
have a material adverse affect on CVD's business, financial condition and
results of operations.
58
<PAGE> 63
RADIANCE MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Radiance was formed in August 1997 and began operations in September 1997.
Radiance currently is attempting to design, develop, manufacture and market a
catheter-based delivery system to deliver radioactive materials to the area of
an artery previously treated with conventional interventional therapy such as
Percutaneous Transluminal Coronary Angioplasty ("PTCA"), atherectomy and/or
stent deployment.
From its formation through September 30, 1998, Radiance's operations were
limited and consisted primarily of research and development and other activities
relating to the early stages of its business. No products have been developed or
sold and operations to date have been financed from the proceeds of a 1997
convertible preferred stock financing which raised $1.5 million. At September
30, 1998, Radiance had an accumulated deficit of approximately $1.2 million.
In September 1997, Radiance entered into a technology license agreement
with CVD relating to technology and patents for the development, manufacture and
commercialization of products for the delivery of radiation therapy to the body
and the use of facilitated force technology to treat diseases of the
cardiovascular system. Under the Agreement, CVD received 750,000 shares of
Radiance Series B Preferred Stock and a warrant, exercisable for a three-year
period, to purchase 1,500,000 shares of Series B Preferred Stock at the lesser
of 1.5 times the most recent equity offering price or $2.05 per share. In
September of 1998, CVD exercised the warrant at $.975 per share. Additionally,
Radiance agreed to pay CVD royalties based upon net sales of licensed products,
subject to minimum payments, beginning in March of 1998. The Agreement expires
on the later of twenty years from the date of the Agreement or the expiration of
the licensed patents. Based upon the licensed technology and the developments of
this technology by Radiance, a prototype radiation delivery system has been
developed, and Radiance has begun animal trials to test the design and efficacy
of the device.
RESULTS OF OPERATIONS
FROM FORMATION (AUGUST 15, 1997) THROUGH DECEMBER 31, 1997 AND FOR THE
FIRST NINE MONTHS OF 1998
Research and development. From formation to December 31, 1997, Radiance
expended $131,000 to begin development and testing of possible radiation system
designs. For the first nine months of 1998, Radiance expended an additional
$1,026,000 for the design and development of a prototype and initial clinical
animal trials. Radiance expects research and development expenses to continue to
grow as staffing, facilities and other infrastructure is added to support
expanded animal trials and further prototype development and testing.
General and administrative. General and administrative expenses were
$18,000 and $45,000 for the period ended December 31, 1997 and the first nine
months of 1998, respectively. These expenses consisted primarily of fees paid to
CVD under a month-to-month agreement for administrative management support.
Radiance anticipates adding administrative support staff in 1998 which will
result in an increase in general and administrative expenses in 1999.
Interest Income. Interest income totaled $19,000 and $44,000 for the period
ended December 31, 1997 and for the first nine months of 1998, respectively.
Such interest income was derived from the investment of proceeds received in the
Series A Preferred Stock financing in 1997.
At September 30, 1998, Radiance had an accumulated deficit of $1.2 million
and expects to incur significant losses for at least the next two years in
continuing research and development efforts, supporting clinical trials for FDA
and CE mark approval, building manufacturing capability, developing its
distribution network and sales staff and expanding its administrative staff.
Under the terms of the proposed merger, CVD, with the approval of its Board of
Directors, will commit to spending at least $10.0 million in the aforementioned
efforts to develop and market Radiotherapy products. There can be no assurance
that Radiance ever will be able to achieve or sustain profitability in the
future. Radiance's ability to become
59
<PAGE> 64
profitable will depend upon a variety of factors including timely and successful
research and development, clinical results, regulatory approval filings,
marketing efforts and general economic conditions.
LIQUIDITY AND CAPITAL RESOURCES
Since formation, Radiance has financed its operations from the sale of its
equity securities. From formation to September 30, 1998, Radiance had received
an aggregate of approximately $1.5 million from the private sale of convertible
preferred stock. In addition, in September 1998, CVD exercised in full its
warrant to purchase 1,500,000 shares of Series B Preferred Stock at an exercise
price of $.975 per share. At December 31, 1998 and September 30, 1998,
Radiance's net cash used in operating activities was $59,000 and $318,000,
respectively. The increase in net cash used in operating activities was due
primarily to the funding of research and development.
On December 31, 1997 and September 30, 1998, Radiance had cash of $1.4
million and $2.4 million, respectively. Radiance expects to incur substantial
costs related to, among other things, product design and development, clinical
testing, marketing and sales expenses, and to utilize increased levels of
working capital to finance primarily expansion of its staff and facilities and
research, development and clinical expenses prior to achieving positive cash
flow from operations. Radiance anticipates that its existing capital resources
will not be sufficient to fund its operations for the next eighteen months.
Pursuant to the Merger, CVD, with the approval of its Board of Directors, will
commit to spending at least $10.0 million in the aforementioned efforts to
develop and market Radiotherapy products. Radiance's future capital requirements
will depend on many factors, including its 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. Radiance may need to raise funds
through additional financings, including private or public equity offerings and
collaborative arrangements with existing or new corporate partners.
In September 1998, Radiance and CVD entered into a letter of intent for the
acquisition of Radiance by CVD. Under the terms of the letter of intent, CVD
paid $400,000 to Radiance, and Radiance was required to return that amount to
CVD if an acquisition agreement was executed within 45 days after the letter of
intent, or, if the acquisition agreement was not executed within such 45-day
period the $400,000 would convert into preferred stock of Radiance in its next
preferred stock financing. The Merger Agreement was executed on November 3,
1998, within the 45-day period, and Radiance has since returned the $400,000 to
CVD.
SECURITY OWNERSHIP OF OFFICERS, DIRECTORS AND PRINCIPAL STOCKHOLDERS
The following table sets forth certain information known to CVD regarding
the ownership of CVD's Common Stock as of November 30, 1998 by (i) each
stockholder known to CVD to be a beneficial owner of more than five percent (5%)
of CVD's Common Stock, (ii) each director and nominee for director, (iii) the
Named Officers (as such term is defined under the caption "Executive
Compensation and Related Information -- Summary of Cash and Certain Other
Compensation") and (iv) all current directors and officers of CVD as a group.
<TABLE>
<CAPTION>
PERCENT OF
NUMBER OF SHARES OUTSTANDING
NAME AND ADDRESS BENEFICIALLY OWNED(1) SHARES(2)
---------------- --------------------- -----------
<S> <C> <C>
EndoSonics Corporation................................ 1,350,566 15.19
2870 Kilgore Rd
Rancho Cordova, CA 95670
Interactive Research Advisors, Inc.................... 569,800 6.41
101 Park Center Plaza, Suite 1300
San Jose, CA 95113
William Harris Investors.............................. 537,405 6.04
Two North La Salle Street, Suite 400
Chicago, IL 60602
</TABLE>
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<PAGE> 65
<TABLE>
<CAPTION>
PERCENT OF
NUMBER OF SHARES OUTSTANDING
NAME AND ADDRESS BENEFICIALLY OWNED(1) SHARES(2)
---------------- --------------------- -----------
<S> <C> <C>
Dimensional Fund Advisor.............................. 537,009 6.04
1299 Ocean Avenue 11th Floor
Santa Monica, CA 90401
Boston Scientific Corporation(3)...................... 501,000 5.63
One Boston Scientific Place
Natick, MA 01760
Michael R. Henson(4).................................. 211,187 2.38
Franklin D. Brown(5).................................. 21,000 *
William G. Davis(6)................................... 31,555 *
Gerard von Hoffmann(7)................................ 26,054 *
Stephen R. Kroll(8)................................... 7,000 *
Edward M. Leonard(9).................................. 53,692 *
Edward A. McDonald(10)................................ 49,416 *
Dana P. Nickell(11)................................... 17,239 *
Jeffrey F. O'Donnell(12).............................. 90,984 *
Jeffrey H. Thiel(13).................................. 25,876 *
Claire K. Walker(14).................................. 74,019 *
All directors and officers as a group (11
persons)(15)........................................ 621,622 6.99
Total Principal Stockholders.......................... 4,117,402 46.31
</TABLE>
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* Represents beneficial ownership of less than 1%.
(1) 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 November 30, 1998. Shares issuable pursuant to such options are
deemed outstanding for computing percentage of the person holding such
options but are not deemed to be outstanding for computing the percentage
of any other person.
(2) Applicable percentages are based on 8,891,441 shares, which represents
9,577,416 shares outstanding on November 30, 1998, less 685,975 shares held
by CVD.
(3) Pursuant to a Schedule 13G/A filed with the Commission on February 13,
1998, Boston Scientific Corporation reported that as of December 31, 1997
it had sole voting and investment power over 501,000 shares.
(4) Includes 8,644 shares subject to options exercisable within 60 days after
November 30, 1998.
(5) Includes 20,000 shares subject to options exercisable within 60 days after
November 30, 1998.
(6) Includes 24,625 shares subject to options exercisable within 60 days after
November 30, 1998. Mr. Davis shares voting and investment power with his
spouse as co-trustee with respect to 6,930 shares held in a revocable
trust.
(7) Includes 20,000 shares subject to options exercisable within 60 days after
November 30, 1998.
(8) Mr. Kroll shares voting and investment power with his spouse as co-trustee
with respect to these shares, which are held in a revocable trust. Mr.
Kroll was hired as CVD's Chief Financial Officer on April 1, 1998.
(9) Includes 20,000 shares subject to options exercisable within 60 days after
November 30, 1998. Mr. Leonard shares voting and investment power as a
beneficiary with respect to 22,807 shares held in a retirement trust. Mr.
Leonard disclaims beneficial ownership with respect to 200 shares held by
his spouse and 3,000 shares held as custodian for his minor children under
the Uniform Gift to Minors Act.
(10) Includes 15,833 shares subject to options exercisable within 60 days after
November 30, 1998. Mr. McDonald disclaims beneficial ownership with respect
to 3,000 shares held by his spouse, Kathleen E. Briscoe, M.D., in an IRA
account and 2,000 shares held by the Estate of Lisa M. Briscoe, of which
his spouse serves as a co-executrix and is a beneficiary with respect to 50
percent of the assets.
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(11) Includes 8,166 shares subject to options exercisable within 60 days after
November 30, 1998. Mr. Nickell resigned as CVD's Chief Financial Officer
effective April 1, 1998.
(12) Includes 90,984 shares subject to options exercisable within 60 days after
November 30, 1998.
(13) Includes 25,876 shares subject to options exercisable within 60 days after
November 30, 1998. Mr. Thiel shares voting and investment power with his
spouse with respect to 7,335 shares.
(14) Includes 74,019 shares subject to options exercisable within 60 days after
November 30, 1998.
(15) Includes 258,016 shares subject to options exercisable within 60 days after
November 30, 1998.
VOTE REQUIRED; INDEPENDENT COMMITTEE'S RECOMMENDATION
The affirmative vote of the holders of a majority of the outstanding shares
of Common Stock present and voting on the proposal at the Special Meeting is
required to authorize the Common Stock Issuance and the related Merger.
Abstentions will have the same effect as the votes against the Common Stock
Issuance and related Merger and broker non-votes will have no effect.
THE INDEPENDENT COMMITTEE OF THE BOARD OF DIRECTORS OF CVD UNANIMOUSLY
RECOMMENDS THAT THE STOCKHOLDERS VOTE FOR THE COMMON STOCK ISSUANCE AND RELATED
MERGER. Proxies solicited by management will be voted FOR the Common Stock
Issuance and Merger unless a vote against the proposal or extension is
specifically indicated.
PROPOSAL NO. 2
PROPOSAL TO APPROVE AMENDMENT TO THE
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION TO
CHANGE THE NAME OF CVD
PROPOSED AMENDMENT
CVD's Board of Director's has adopted, and is recommending to the
stockholders for their approval at the Special Meeting, a resolution to amend
Article First of the CVD's Amended and Restated Certificate of Incorporation to
change CVD's name (the "Name Change"). The applicable text of the resolution of
the Board of Directors is as follows:
"RESOLVED, that Article First of the Corporation's Amended and
Restated Certificate of Incorporation be amended to read in its entirety as
follows:
"First: The Name of this corporation is: Radiance Medical Systems,
Inc."
In the judgement of the Board of Directors, the Name Change will be
desirable in view of the significant change of character and strategic focus of
CVD resulting from the Merger if the acquisition of Radiance is consummated.
Approval of Proposal 1 and closing of the Merger is a condition precedent to the
adoption of the proposed Name Change. If the amendment is adopted, CVD
Stockholders will not be required to exchange outstanding stock certificates for
new certificates.
APPROVAL BY STOCKHOLDERS
Approval of the proposal requires the affirmative vote of a majority of the
outstanding shares of CVD stock entitled to vote at the Special Meeting.
Abstentions and broker non-votes will have the same effect as votes against the
Name Change. If approved by the stockholders, the amendment to Article First
will become effective upon filing with the Secretary of State of Delaware a
Certificate of Amendment to CVD's Amended
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and Restated Certificate of Incorporation, which filing is expected to take
place at, or shortly after, the Effective Time. However, the Board of Directors
will be authorized, without a further vote of the stockholders, to abandon the
Name Change and determine not to file the Certificate of Amendment if the Board
of Directors concludes that such action would be in the best interest of CVD and
its stockholders. If this proposal is not approved by the stockholders, then the
Certificate of Amendment will not be filed and CVD will adopt Radiance Medical
Systems, Inc. as a name under which it does business -- the official corporate
name will remain CardioVascular Dynamics, Inc.
RECOMMENDATION
THE BOARD OF DIRECTORS OF CVD UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS
VOTE FOR APPROVAL OF THE NAME CHANGE. Proxies solicited by management will be
voted FOR the Name Change unless a vote against the proposal or is specifically
indicated.
PROPOSAL NO. 3
PROPOSAL TO APPROVE AMENDMENT TO THE
1996 STOCK OPTION/STOCK ISSUANCE PLAN OF CVD
GENERAL
The stockholders are being asked to vote on a proposal to approve an
amendment to the Company's 1996 Stock Option/Stock Issuance Plan (the "Option
Plan") to increase the number of shares of Common Stock authorized for issuance
under the Option Plan by an additional 750,000 shares.
The amendment to the Option Plan was adopted by the Board on November 3,
1998, subject to stockholder approval at the Special Meeting. The Board believes
it is in the best interests of the Company to increase the share reserve so that
the Company can continue to attract and retain the services of those persons
essential to the Company's growth and financial success, after the Closing of
the acquisition of Radiance. Approval of Proposal No. 1 and closing of the
Merger is a condition precedent to the implementation of the increase in share
reserve.
The Option Plan originally was adopted by the Board of Directors on May 1,
1996 and approved by the stockholders on May 1, 1996. The Option Plan was
amended by the Board of Directors on April 8, 1997 and approved by the
stockholders on May 16, 1997, and again amended by the Board of Directors on
March 12, 1998 and approved by the stockholders on May 19, 1998
The following is a summary of the principal features of the Option Plan, as
recently amended for the share increase. The summary, however, does not purport
to be a complete description of all the provisions of the Option Plan. Any
stockholder who wishes to obtain a copy of the actual plan document may do so by
written request to the Secretary of CVD at CVD's executive offices in Irvine,
California.
EQUITY INCENTIVE PROGRAMS
The Option Plan is comprised of three separate equity incentive programs:
(i) a Discretionary Option Grant Program; (ii) a Stock Issuance Program; and
(iii) an Automatic Option Grant Program. The Compensation Committee of the Board
administers the Discretionary Option Grant and Stock Issuance Programs to all
persons eligible to participate in the Option Plan, the Discretionary Option
Grant and Stock Issuance Programs, subject to separate but concurrent
administration by the Board. The Plan Administrator (either the Compensation
Committee or the Board, to the extent such entity is carrying out its
administrative functions under the Option Plan with respect to one or more
classes of eligible individuals), has complete discretion (subject to the
provisions of the Option Plan) to authorize discretionary option grants or stock
issuances under the Option Plan. However, all grants under the Automatic Option
Grant Program will be made in strict compliance with the provisions of that
program, and no administrative discretion is exercised by the Plan Administrator
with respect to the grants made thereunder.
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SHARE RESERVE
The maximum number of shares of Common Stock issuable over the term of the
Option Plan may not exceed 2,850,000 shares (including the 750,000 shares for
which stockholder approval is sought under this Proposal). In no event may any
one participant in the Option Plan be granted stock options or separately
exercisable stock appreciation rights for more than 800,000 shares in the
aggregate over the term of the Option Plan.
As of November 30, 1998, approximately [442,000] shares of Common Stock had
been issued under the Option Plan, approximately [1,551,000] shares of Common
Stock were subject to outstanding options, and approximately [197,000] shares of
Common Stock were available for future option grants.
NEW PLAN BENEFITS
As of November 15, 1998, no options have been granted on the basis of the
750,000 share increase for which stockholder approval is sought under this
Proposal.
In the event any change is made to the outstanding shares of Common Stock
by reason of any recapitalization, stock dividend, stock split, combination of
shares, exchange of shares or other change in corporate structure effected
without the Company's receipt of consideration, appropriate adjustments will be
made to the number and class of securities issuable (in the aggregate and to
each participant) under the Option Plan and to the number and class of
securities subject to each outstanding option and the exercise price payable per
share for those securities.
ELIGIBILITY
Employees (including officers), non-employee Board members, consultants and
other independent advisors who provide services to CVD and its parent or
subsidiaries (whether now existing or subsequently established) will be eligible
to participate in the Discretionary Option Grant and Stock Issuance Programs.
Non-employee members of the Board will also be eligible to participate in the
Automatic Grant Program.
As of December 10, 1998, approximately 99 employees (including six
executive officers), and four non-employee Board members were eligible to
participate in the Discretionary Option Grant and Stock Issuance Programs and
four non-employee Board members were eligible to participate in the Automatic
Option Grant Program.
VALUATION
The fair market value per share of Common Stock on any relevant date under
the Option Plan will be the closing selling price per share on that date on the
Nasdaq National Market. On December 11, 1998, the closing selling price per
share was $3.625.
DISCRETIONARY OPTION GRANT PROGRAM
Options may be granted under the Discretionary Option Grant Program at an
exercise price per share not less than 85 percent of the fair market value per
share of Common Stock on the option grant date. No granted option will have a
term in excess of ten years.
Upon cessation of service, the optionee will have a limited period of time
in which to exercise any outstanding option to the extent such option is
exercisable for vested shares. The Plan Administrator will have complete
discretion to extend the period following the optionee's cessation of service
during which his or her outstanding options may be exercised and/or to
accelerate the exercisability or vesting of such options in whole or in part.
Such discretion may be exercised at any time while the options remain
outstanding, whether before or after the optionee's actual cessation of service.
The Plan Administrator is authorized to issue two types of stock
appreciation rights in connection with option grants made under the
Discretionary Option Grant Program:
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Tandem stock appreciation rights provide the holders with the right to
surrender their options for an appreciation distribution from the Company equal
in amount to the excess of (a) the fair market value of the vested shares of
Common Stock subject to the surrendered option over (b) the aggregate exercise
price payable for such shares. Such appreciation distribution may, at the
discretion of the Plan Administrator, be made in cash or in shares of Common
Stock. Limited stock appreciation rights may be granted to officers of the
Company as part of their option grants. Any option with such a limited stock
appreciation right in effect will be automatically cancelled upon the successful
completion of a hostile take-over of the Company. In return for the cancelled
option, the officer will be entitled to a cash distribution from the Company in
an amount per cancelled option share equal to the excess of (a) the take-over
price per share over (b) the exercise price payable for such share.
The Plan Administrator will have the authority to effect the cancellation
of outstanding options under the Discretionary Option Grant Program which have
exercise prices in excess of the then current market price of Common Stock and
to issue replacement options with an exercise price based on the market price of
Common Stock at the time of the new grant.
STOCK ISSUANCE PROGRAM
Shares may be sold under the Stock Issuance Program at a price per share
not less than eighty-five percent (85%) of the fair market value per share of
Common Stock, payable in cash or through a promissory note payable to the
Company. Shares may also be issued solely as a bonus for past services.
The issued shares either may be vested immediately upon issuance or subject
to a vesting schedule tied to the performance of service or the attainment of
performance goals. The Plan Administrator will, however, have the discretionary
authority at any time to accelerate the vesting of any unvested shares.
AUTOMATIC OPTION GRANT PROGRAM
Under the Automatic Option Grant Program, option grants have been made to
the current non-employee Board members, and option grants will be made to
individuals who join the Board as non-employee members in the future. Additional
automatic option grants will be made at annual intervals to all non-employee
Board members over their continued period of service on the Board. These special
grants may be summarized as follows:
A. Each individual who served as a non-employee Board member on June
19, 1996 was automatically granted on such date an option to purchase 5,000
shares of Common Stock.
B. Each individual who first becomes a non-employee Board member at
any time after June 19, 1996, whether through election by the stockholders
or appointment by the Board, will automatically be granted, at the time of
such initial election or appointment, an option to purchase 5,000 shares of
Common Stock.
C. On the date of each Annual Stockholders Meeting held after June 19,
1996, each individual who is to continue to serve as a non-employee Board
member after such Annual Meeting will receive an additional option grant to
purchase 5,000 shares of Common Stock, provided such individual has been a
member of the Board for at least six (6) months.
Each option will have an exercise price per share equal to 100% of the fair
market value per share of Common Stock on the option grant date and a maximum
term of ten years measured from the option grant date.
Each option will be immediately exercisable for all the option shares, but
any purchased shares will be subject to repurchase by the Company, at the
exercise price paid per share, upon the optionee's cessation of Board service.
Each initial option grant will vest (and the Company's repurchase rights
will lapse) in four equal annual installments over the optionee's period of
Board service, with the first such installment to vest upon the
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completion of one year of Board service measured from the option grant date.
Each annual option grant will vest (and the Company's repurchase rights will
lapse) upon the completion of one year of Board service measured from the option
grant date.
The shares subject to each automatic option grant will immediately vest
upon the optionee's death or permanent disability or an acquisition of the
Company by Merger or asset sale or a hostile change in control of the Company
(whether by successful tender offer for more than 50% of the outstanding voting
stock or by proxy contest for the election of Board members). In addition, upon
the successful completion of a hostile take-over, each automatic option grant
may be surrendered to the Company for a cash distribution per surrendered option
share in an amount equal to the excess of (a) the take-over price per share over
(b) the exercise price payable for such share.
GENERAL PROVISIONS
ACCELERATION
In the event that the Company is acquired by Merger or asset sale, each
outstanding option under the Discretionary Option Grant Program which is not to
be assumed by the successor corporation or replaced with a comparable option to
purchase shares of the capital stock of the successor corporation will
automatically accelerate in full, and all unvested shares under the Stock
Issuance Program will immediately vest, except to the extent the Company's
repurchase rights with respect to those shares are to be assigned to the
successor corporation. The Plan Administrator will have the discretion to grant
options under the Discretionary Option Grant Program which automatically
accelerate if the options are assumed or replaced in connection with such
acquisition and the individual's service is subsequently terminated within a
designated period (not to exceed 18 months) following the acquisition. The Plan
Administrator will also have the discretion to grant options which automatically
accelerate in the event the individual's service is terminated within a
designated period (not to exceed 18 months) following a hostile change in
control of the Company (whether by successful tender offer for more than 50% of
the outstanding voting stock or by proxy contest for the election of Board
members). The Plan Administrator may also provide for the automatic vesting of
any outstanding shares under the Stock Issuance Program upon similar terms and
conditions.
The acceleration of vesting in the event of a change in the ownership or
control of the Company may be seen as an anti-takeover provision and may have
the effect of discouraging a Merger proposal, a takeover attempt or other
efforts to gain control of the Company.
FINANCIAL ASSISTANCE
The Plan Administrator may permit one or more participants to pay the
exercise price of outstanding options or the purchase price of the shares under
the Option Plan by delivering a promissory note payable in installments. The
Plan Administrator will determine the terms of any such promissory note.
However, the maximum amount of financing provided any optionee may not exceed
the cash consideration payable for the purchased shares plus all applicable
taxes incurred in connection with the acquisition of the shares. Any such
promissory note may be subject to forgiveness in whole or in part, at the
discretion of the Plan Administrator, over the participant's period of service.
SPECIAL TAX ELECTION
The Plan Administrator may provide one or more holders of options or
unvested shares with the right to have the Company withhold a portion of the
shares otherwise issuable to such individuals in satisfaction of the tax
liability incurred by such individuals in connection with the exercise of those
options or the vesting of those shares. Alternatively, the Plan Administrator
may allow such individuals to deliver previously acquired shares of Common Stock
in payment of such tax liability.
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AMENDMENT AND TERMINATION
The Board may amend or modify the Option Plan in any or all respects
whatsoever subject to any required stockholder approval. The Board may terminate
the Option Plan at any time, and the Option Plan will in any event terminate on
April 29, 2006.
SUMMARY OF FEDERAL INCOME TAX CONSEQUENCES
OPTION GRANTS
The following is a summary of certain federal income tax consequences of
participation in the Option Plan. The summary should not be relied upon as being
a complete statement. Federal tax laws are complex and subject to change.
Moreover, participation in the Plan may also have consequences under state and
local tax laws which may vary from the federal tax consequences described below.
For such reasons, the Company recommends that each participant consult his or
her personal tax advisor to determine the specific tax consequences applicable
to him or her.
INCENTIVE STOCK OPTIONS
No taxable income will be recognized by an optionee under the Plan upon
either the grant or the exercise of an incentive option. Instead, a taxable
event will occur upon the sale or other disposition of the shares acquired upon
exercise of an incentive option, and the tax treatment of the gain or loss
realized will depend upon how long the shares were held before their sale or
disposition. As is discussed below, the exercise of an incentive option also may
result in items of "tax preference" for purposes of the "alternative minimum
tax."
If a sale or other disposition of the shares received upon the exercise of
an incentive option occurs more than (i) one year after the date of exercise of
the option and (ii) two years after the date of grant of the option, the holder
will recognize long-term capital gain or loss at the time of sale equal to the
full amount of the difference between the proceeds realized and the exercise
price paid. However, a sale, exchange, gift or other transfer of legal title of
such stock before the expiration of either the one-year or two-year period
described above will constitute a "disqualifying disposition." A disqualifying
disposition involving a sale or exchange will result in ordinary income to the
optionee in an amount equal to the lesser of (i) the fair market value of the
stock on the date of exercise minus the exercise price, or (ii) the amount
realized on disposition minus the exercise price. If the amount realized in a
disqualifying disposition exceeds the fair market value of the stock on the date
of exercise, the gain realized, in excess of the amount taxed as ordinary income
as indicated above, will be taxed as capital gain. A disqualifying disposition
as a result of a gift will result in ordinary income to the optionee in an
amount equal to the difference between the exercise price and the fair market
value of the stock on the date of exercise. Any loss realized upon a
disqualifying disposition will be treated as a capital loss. Capital gains and
losses resulting from disqualifying dispositions will be treated as long-term or
short-term depending upon whether the shares were held for more or less than the
applicable statutory holding period (which currently is more than 12 months for
long-term capital gains). The Company will be entitled to a tax deduction in an
amount equal to the ordinary income recognized by the optionee as a result of
the disqualifying disposition.
If legal title to any shares acquired upon exercise of an incentive option
is transferred by sale, gift or exchange, such transfer will be treated as a
disposition for purposes of determining whether a "disqualifying disposition"
has occurred. However, certain transfers will not be treated as dispositions for
such purposes, such as transfers to an estate or by inheritance upon an
optionee's death, a mere pledge or hypothecation, or a transfer into the name of
the optionee and another person as joint tenants.
Section 55 of the Code imposes an "alternative minimum tax" on an
individual's income to the extent the amount of the alternative minimum tax
exceeds the individual's regular tax for the year. For purposes of computing the
alternative minimum tax, the excess of the fair market value (on the date of
exercise) of the shares received upon the exercise of an incentive option over
the exercise price paid is included in alternative minimum taxable income in the
year the option is exercised. If the shares are sold in the same year that the
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option is exercised, the regular tax treatment and the alternative tax treatment
will be the same. If the shares are sold during a year subsequent to that in
which the option was exercised, the basis of the stock acquired will equal its
fair market value on the date of exercise for purposes of computing alternative
minimum taxable income in the year of sale. For example, assume that an
individual pays an exercise price of $10 to purchase stock having a fair market
value of $15 on the date of exercise. The amount included in alternative minimum
taxable income is $5, and the stock has a basis of $10 for regular tax purposes
and $15 for alternative minimum tax purposes. If the individual sells the stock
in a subsequent year for $20, the gain recognized is $10 for regular tax
purposes and $5 for alternative minimum tax purposes.
An optionee who is subject to the alternative minimum tax in the year of
exercise of an incentive option may claim as a credit against the optionee's
regular tax liability in future years, the amount of alternative minimum tax
paid that is attributable to the exercise of the incentive option. This credit
is available in the first year following the year of exercise in which the
optionee has a regular tax liability.
Under the Plan, the Plan Administrator may permit an optionee to pay the
exercise price of an incentive option in certain circumstances by delivering
shares of Common Stock of the Company already owned by the optionee, valued at
their fair market value on the date of exercise. Generally, if the exercise
price of an incentive option is paid with already-owned shares or by a
combination of cash and already-owned shares, there will be no current taxable
gain or loss recognized by the optionee on the already-owned shares exchanged. A
special rule applies, however, if the shares exchanged were previously acquired
through the exercise of an incentive option and the applicable holding period
requirements for favorable tax treatment of such shares have not been met at the
time of the exchange. In such event, the exchange will be treated as a
disqualifying disposition of such shares and will result in the recognition of
income to the optionee, in accordance with the rules described above for
disqualifying dispositions. If this special rule does not apply, then the new
shares received by the optionee upon the exercise of the option equal in number
to the old shares exchanged will have the same tax basis and holding period for
capital gain purposes as the optionee's basis and holding period in the old
shares. The balance of the shares received by the optionee upon exercise of the
option will have a tax basis equal to any cash paid by the optionee, and if no
cash was paid, the tax basis of such shares will be zero. The holding period of
the additional shares for capital gain purposes will commence on the date of
exercise. The holding period for purposes of the one-year and two-year periods
described above will commence on the date of exercise as to all of the shares
received upon the exercise of an incentive option. If any of the shares subject
to the basis allocation rules described above are subsequently transferred in a
disqualifying disposition, the shares with the lowest tax basis will be treated
as being transferred first.
NONQUALIFIED OPTIONS
No taxable income is recognized by an optionee upon the grant of a
nonqualified option. Upon exercise, however, the optionee will recognize
ordinary income in the amount by which the fair market value of the shares
purchased exceeds, on the date of exercise, the exercise price paid for such
shares. The income recognized by an optionee who is an employee will be subject
to income tax withholding by the Company, which the optionee will be required to
satisfy. The Company will be entitled to a tax deduction equal to the amount of
ordinary income recognized by the optionee, provided certain reporting
requirements are satisfied.
If the exercise price of a nonqualified option is paid by the optionee in
cash, the tax basis of the shares acquired will be equal to the cash paid plus
the amount of income recognized by the optionee as a result of such exercise. If
the exercise price is paid by delivering shares of Common Stock of the Company
already owned by the optionee or by a combination of cash and already-owned
shares, there will be no current taxable gain or loss recognized by the optionee
on the already-owned shares exchanged (however, the optionee will nevertheless
recognize ordinary income to the extent that the fair market value of the shares
purchased on the date of exercise exceeds the price paid, as described above).
The new shares received by the optionee equal in number to the old shares
exchanged will have the same tax basis and holding period as the optionee's
basis and holding period in the old shares. The balance of the shares received
will have a tax basis equal to any cash paid by the optionee plus the amount of
income recognized by the optionee as a result of such exercise, and will have a
holding period commencing with the date of exercise.
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If the shares acquired upon exercise of the non-statutory option are
unvested and subject to repurchase by the Company in the event of the optionee's
termination of service prior to vesting in those shares, then the optionee will
not recognize any taxable income at the time of exercise but will have to report
as ordinary income, as and when the Company's repurchase right lapses, an amount
equal to the excess of (i) the fair market value of the shares on the date the
repurchase right lapses over (ii) the exercise price paid for the shares. The
optionee may, however, elect under Section 83(b) of the Internal Revenue Code to
include as ordinary income in the year of exercise of the option an amount equal
to the excess of (i) the fair market value of the purchased shares on the
exercise date over (ii) the exercise price paid for such shares. If the Section
83(b) election is made, the optionee will not recognize any additional income as
and when the repurchase right lapses.
Upon the sale or disposition of shares acquired pursuant to the exercise of
a nonqualified option, the difference between the proceeds realized and the
optionee's basis in the shares will be a capital gain or loss and will be
treated as long-term or short-term capital gain or loss if the shares have been
held for more than the applicable statutory holding period (which currently more
than 12 months for long-term capital gains).
STOCK ISSUED UNDER STOCK ISSUANCE PROGRAM
The receipt of restricted stock issued under the Stock Issuance Program
will not result in a taxable event to the participant until the expiration of
any repurchase rights retained by the Company with respect to such stock, unless
the participant makes an election under Section 83(b) of the Code to be taxed as
of the date of purchase. If no repurchase rights are retained, or if a Section
83(b) election is made, the participant will recognize ordinary income in an
amount equal to the excess of the fair market value of such shares on the date
of purchase over the purchase price paid for such shares. Even if the purchase
price and the fair market value of the shares are the same (in which case there
would be no ordinary income), a Section 83(b) election must be made to avoid
deferral of the date ordinary income is recognized. The election must be filed
with the Internal Revenue Service not later than 30 days after the date of
transfer.
If no Section 83(b) election is made or if no repurchase rights are
retained, a taxable event will occur on each date the participant's ownership
rights vest (e.g., when the Company's repurchase rights expire) as to the number
of shares that vest on that date, and the holding period for capital gain
purposes will not commence until the date the shares vest. The participant will
recognize ordinary income on each date shares vest in an amount equal to the
excess of the fair market value of such shares on that date over the amount paid
for such shares. Any income recognized by a participant who is an employee will
be subject to income tax withholding by the Company, which the participant will
be required to satisfy. The Company is entitled to a tax deduction in an amount
equal to the ordinary income recognized by the participant. The participant's
basis in the shares will be equal to the purchase price, if any, increased by
the amount of ordinary income recognized.
STOCK APPRECIATION RIGHTS
An optionee who is granted a stock appreciation right will recognize
ordinary income in the year of exercise equal to the amount of the appreciation
distribution. The Company will be entitled to an income tax deduction equal to
the appreciation distribution for the taxable year in which such ordinary income
is recognized by the optionee.
DEDUCTIBILITY OF EXECUTIVE COMPENSATION
The Company anticipates that any compensation deemed paid by it in
connection with disqualifying dispositions of incentive stock option shares or
exercises of non-statutory options granted with exercise prices equal to the
fair market value of the shares on the grant date will qualify as
performance-based compensation for purposes of Internal Revenue Code Section
162(m) and will not have to be taken into account for purposes of the $1 million
limitation per covered individual on the deductibility of the compensation paid
to certain executive officers of the Company. Accordingly, all compensation
deemed paid with respect to those options will remain deductible by the Company
without limitation under Internal Revenue Code Section 162(m).
69
<PAGE> 74
EXECUTIVE COMPENSATION AND RELATED INFORMATION
COMPENSATION COMMITTEE REPORT
The Compensation Committee of the Board of Directors makes recommendations
to the full Board with respect to the base salary and bonuses to be paid to the
Company's executive officers each fiscal year. In addition, the Compensation
Committee has the exclusive authority to administer the CVD 1996 Stock
Option/Stock Issuance Plan with respect to option grants and stock issuances
made thereunder to officers and other key employees. The following is a summary
of the policies of the Compensation Committee which affect the compensation paid
to executive officers, as reflected in the tables and text set forth elsewhere
in this Proxy Statement.
GENERAL COMPENSATION POLICY
CVD's compensation policy is designed to attract and retain qualified key
executives critical to the Company's success and to provide such executives with
performance-based incentives tied to the achievement of Company milestones. One
of the Compensation Committee's primary objectives is to have a substantial
portion of each officer's total compensation contingent upon the Company's
performance as well as upon the individual's contribution to the success of CVD
as measured by his personal performance. Accordingly, each executive officer's
compensation package is comprised primarily of three elements: (i) base salary
which reflects individual performance and expertise and is designed to be
competitive with salary levels in the industry; (ii) variable performance awards
payable in cash and tied to the Company's achievement of certain goals; and
(iii) long-term stock-based incentive awards which strengthen the mutuality of
interests between the executive officers and the CVD stockholders.
FACTORS
The principal factors which the Compensation Committee considered in
establishing the components of each executive officer's compensation package for
the 1997 fiscal year are summarized below. However, the Committee may in its
discretion apply different factors, particularly different measures of financial
performance, in setting executive compensation for future fiscal years.
BASE SALARY
The base salary levels for the executive officers were established by the
Board for the 1997 fiscal year on the basis of the following factors: personal
performance, the estimated salary levels in effect for similar positions at a
select group of companies with which the Company competes for executive talent,
and internal comparability considerations. Although the Compensation Committee
reviewed various compensation surveys, the Board, did not rely upon any specific
survey for comparative compensation purposes. Instead, the Board made its
decisions as to the appropriate market level of base salary for each executive
officer on the basis of its understanding of the salary levels in effect for
similar positions at those companies with which the Company competes for
executive talent. Base salaries will be reviewed by the Compensation Committee
on an annual basis, and adjustments will be made in accordance with the factors
indicated above.
ANNUAL INCENTIVE COMPENSATION
The CVD Employee Bonus Plan provides the Board of Directors with
discretionary authority to award cash bonuses to executive officers and
employees in accordance with recommendations made by the Compensation Committee.
The Compensation Committee's recommendations are based upon the extent to which
certain financial and performance targets (established semi-annually by the
Compensation Committee) are met and the contribution of each such officer and
employee to the attainment of such targets. For fiscal year 1997, the
performance targets for each of the Named Officers included gross sales, cash
flow, engineering product goals and regulatory submission goals. The weight
given to each factor varied from individual to individual.
70
<PAGE> 75
LONG-TERM INCENTIVE COMPENSATION
The 1996 Stock Option/Stock Issuance Plan also provides the Board with the
ability to align the interests of the executive officer with those of the
stockholders and provide each individual with a significant incentive to manage
CVD from the perspective of an owner with an equity stake in the business. The
number of shares subject to each option grant is based upon the officer's
tenure, level of responsibility and relative position in CVD. The Company has
established general guidelines for making option grants to the executive
officers in an attempt to target a fixed number of unvested option shares based
upon the individual's position with the Company and their existing holdings of
unvested options. However, the Company does not adhere strictly to these
guidelines and will vary the size of the option grant made to each executive
officer as it feels the circumstances warrant. Each grant allows the officer to
acquire shares of CVD Common Stock at a fixed price per share (the market price
on the grant date) over a specified period of time (up to 10 years from the date
of grant). The option normally vests in periodic installments over a four-year
period, contingent upon the executive officer's continued employment with the
Company. Accordingly, the option will provide a return to the executive officer
only if he or she remains in the Company's employ and the market price of the
Company's Common Stock appreciates over the option term.
CEO COMPENSATION
The Compensation Committee set the base salary for Mr. Michael R. Henson,
the Company's Chief Executive Officer for the 1997 fiscal year, at a level which
is designed to provide him with a salary competitive with salaries paid to chief
executive officers of similarly-sized companies in the industry and commensurate
with Mr. Henson's experience. The Compensation Committee's did not intend to
have this particular component of Mr. Henson's compensation affected to any
significant degree by Company performance. Mr. Henson received stock option
grants in January and April of 1997 to purchase a total of 55,000 shares. The
grants were intended as compensation for Mr. Henson's performance during the
1996 fiscal year. Mr. Henson did not receive any option grants intended as
long-term incentive compensation for the 1997 fiscal year.
COMPLIANCE WITH INTERNAL REVENUE CODE SECTION 162(M)
Section 162(m) of the Internal Revenue Code, enacted in 1993, generally
disallows a tax deduction to publicly held corporations for compensation
exceeding $1 million paid to certain of the corporation's executive officers.
The limitation applies only to compensation which is not considered to be
performance-based. The non-performance based compensation to be paid to the
Company's executive officers for the 1997 fiscal year did not exceed the $1
million limit per officer, nor is it expected that the non-performance based
compensation to be paid to the Company's executive officers for fiscal 1998 will
exceed that limit. The Company's 1996 Stock Option/Stock Issuance Plan is
structured so that any compensation deemed paid to an executive officer in
connection with the exercise of option grants made under that plan will qualify
as performance-based compensation which will not be subject to the $1 million
limitation. Because it is very unlikely that the cash compensation payable to
any of the Company's executive officers in the foreseeable future will approach
the $1 million limit, the Compensation Committee has decided at this time not to
take any other action to limit or restructure the elements of cash compensation
payable to the Company's executive officers. The Compensation Committee will
reconsider this decision should the individual compensation of any executive
officer ever approach the $1 million level.
COMPENSATION COMMITTEE
William G. Davis
Franklin D. Brown
71
<PAGE> 76
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Compensation Committee of the Company's Board of
Directors for the 1997 fiscal year were Franklin D. Brown (who replaced Mitchell
Dann in December 1997 upon Mr. Dann's resignation from the Board) and William G.
Davis. No member of the Compensation Committee was at any time during the 1997
fiscal year or at any other time an officer or employee of CVD.
Michael Henson, who is the Chairman of the Board of Directors of CVD and
Radiance, is the Chief Executive Officer of Radiance. Jeffrey O'Donnell, who is
the Chief Executive Officer of CVD, is a member of the Board of Directors of
Radiance. No other executive officer of CVD served on the board of directors or
compensation committee of any entity which has one or more executive officers
serving as a member of the Company's Board of Directors or Compensation
Committee.
72
<PAGE> 77
STOCK PERFORMANCE GRAPH
The graph depicted below shows CVD's stock price as an index assuming $100
invested on June 19, 1996 (the date of CVD's initial public offering), along
with the composite prices of companies listed on the CRSP Total Return Index for
National Association of Securities Dealers Automated Quotation ("Nasdaq") Stock
Market and the Hambrecht & Quist Incorporated Total Return Index for Healthcare
Technology Companies (Excluding Biotechnology). This information has been
provided to CVD by Hambrecht & Quist Incorporated.
chart
<TABLE>
<CAPTION>
H&Q Healthcare
Excl. Biotech Nasdaq Stock
Cardio Vascular Index Market-U.S. Index
--------------- -------------- -----------------
<S> <C> <C> <C>
6/19/96 100.00 100.00 100.00
Jun-96 102.08 100.69 95.49
Jul-96 106.25 92.23 86.99
Aug-96 125.00 98.24 91.86
Sep-96 127.08 110.50 98.89
Oct-96 108.33 104.75 97.80
Nov-96 102.08 107.98 103.84
Dec-96 108.33 111.18 103.75
Jan-97 85.42 117.25 111.12
Feb-97 89.58 115.32 104.98
Mar-97 83.33 105.61 98.12
Apr-97 59.38 107.95 101.19
May-97 64.58 118.64 112.67
Jun-97 65.63 126.43 116.11
Jul-97 75.52 133.40 128.37
Aug-97 64.58 126.71 128.17
Sep-97 66.67 132.52 135.75
Oct-97 56.25 125.97 128.70
Nov-97 45.83 128.32 129.33
Dec-97 45.83 132.50 127.31
</TABLE>
Note: Assumes $100 invested on 6/19/96 in CVD and in the CRSP Total Return Index
for Nasdaq Stock Market and the H&Q Total Return Index for Healthcare
Technology Companies (Excluding Biotechnology). Assumes Reinvestment of
Dividends on a daily basis.
Notwithstanding anything to the contrary set forth in any of the Company's
previous filings under the Securities Act of 1933 or the Securities Exchange Act
of 1934 which might incorporate future filings, including this Proxy Statement,
the preceding Compensation Committee Report on Executive Compensation and the
Company Stock Performance Graph will not be incorporated by reference into any
of those prior filings, nor will such report or graph be incorporated by
reference into any future filings made by the Company under those statutes.
73
<PAGE> 78
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
The following table sets forth the compensation earned, by the Company's
Chief Executive Officer, Mr. Henson, and five executive officers whose
compensation for the 1997 fiscal year was in excess of $100,000, for services
rendered in all capacities to the Company for each of the last two fiscal years.
All the individuals named in the table will hereinafter be referred to as the
"Named Officers."
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
---------------------------------
SHARES
NAME AND UNDERLYING
PRINCIPAL POSITION YEAR SALARY(1) BONUS(2) OPTIONS
------------------ ---- --------- -------- ----------
<S> <C> <C> <C> <C>
Michael R. Henson(*).................................. 1997 $219,051 $22,000 55,000(3)
Chairman of the Board 1996 200,000 60,000 130,000(4)
1995 189,850 70,000 250,000
Edward A. McDonald(**)................................ 1997 119,580 9,600 50,000
Vice President, Advanced Technologies
Dana P. Nickell(***).................................. 1997 120,960 7,258 30,000(3)
Vice President, Finance and Administration, 1996 108,000 19,440 --
Chief Financial Officer and Secretary 1995 5,934 -- 56,000
Jeffrey F. O'Donnell(****)............................ 1997 181,034 15,550 145,000(5)
President and Chief Executive Officer 1996 179,200 15,000 --
1995 8,585 4,000 100,000
Jeffrey H. Thiel...................................... 1997 120,000 12,000 58,000(6)
Vice President, Operations 1996 18,371 -- 50,000
Claire K. Walker...................................... 1997 113,275 11,214 38,000(3)
Vice President, Clinical Affairs
</TABLE>
- ---------------
(*) Mr. Henson also served as the Chief Executive Officer of CVD until June
1998. The Board of Directors has elected Mr. Henson to serve as Chief
Executive Officer of CVD upon the effectiveness of Mr. O'Donnell's
resignation in March 1999.
(**) Mr. McDonald resigned as Vice President, Advanced Technologies in October
1998.
(***) Mr. Nickell resigned as Vice President, Finance and Administration, Chief
Financial Officer and Secretary in April 1998.
(****) Mr. O'Donnell served as the President and Chief Operating Officer of CVD
until June 1998. Mr. O'Donnell has resigned as Chief Executive Officer of
CVD effective March 1999.
(1) Includes amounts contributed by the Named Officers to the Company's 401(K)
Plan.
(2) Represents amounts paid in subsequent fiscal year for work performed in
prior fiscal year.
(3) Represents options granted in 1997 fiscal year for work performed in 1996
fiscal year.
(4) Mr. Henson voluntarily returned to the Company in 1997 options to acquire
130,000 shares. The Company has not made any replacement grants for such
options, nor is there any agreement to do so.
(5) Includes 25,000 options granted in 1997 fiscal year for work performed in
1996 fiscal year.
(6) Includes 38,000 options granted in 1997 fiscal year for work performed in
1996 fiscal year.
(7) Includes 28,000 options granted in 1997 fiscal year for work performed in
1996 fiscal year.
74
<PAGE> 79
STOCK OPTIONS
The following table provides information with respect to the stock option
grants made during the 1997 fiscal year under the Company's 1996 Stock
Option/Stock Issuance Plan to the Named Officers. No stock appreciation rights
were granted during such fiscal year to the Named Officers.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------------------------------
% OF TOTAL POTENTIAL REALIZABLE VALUE
NUMBER OF OPTIONS AT ASSUMED ANNUAL RATES OF
SECURITIES GRANTED TO EXERCISE STOCK PRICE APPRECIATION
UNDERLYING EMPLOYEES OR BASE FOR OPTION TERM
OPTION IN FISCAL PRICE EXPIRATION ---------------------------
NAME GRANTED(1)(5) YEAR(2) ($/SH)(3)(5) DATE 5%($)(4)(5) 10%($)(4)(5)
---- ------------- ---------- ------------ ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Michael R. Henson...... 40,000 5 9.50 1/12/07 238,980 605,622
15,000 2 6.88 4/20/07 64,902 164,474
Edward A. McDonald..... 40,000 5 6.88 4/20/07 173,072 438,598
10,000 1 5.00 12/17/07 31,445 79,687
Dana P. Nickell........ 25,000 3 9.50 1/12/07 149,362 378,514
5,000 1 6.88 4/20/07 21,634 54,825
Jeffrey F. O'Donnell... 15,000 2 9.50 1/12/07 89,617 227,108
10,000 1 6.88 4/20/07 43,268 109,649
100,000 11 7.31 9/18/07 459,722 1,165,026
20,000 2 5.00 12/17/07 62,889 159,374
Jeffrey H. Thiel....... 8,000 1 9.50 1/12/07 47,796 121,124
30,000 3 6.88 4/20/07 129,804 328,948
20,000 2 5.00 12/17/07 62,889 159,374
Claire K. Walker....... 10,000 1 9.50 1/12/07 59,745 151,406
18,000 2 6.88 4/20/07 77,882 197,369
10,000 1 5.00 12/18/07 31,445 79,687
</TABLE>
- ---------------
(1) The option listed in the table was granted under the Company's 1996 Stock
Option/Stock Issuance Plan. The options have a maximum term of ten years
measured from the date of grant. Twenty-five percent (25%) of the options
are exercisable upon the optionee's completion of one year of service
measured from the date of grant, 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.
(2) Based upon options granted for an aggregate of 870,000 shares to employees
in 1997, including the Named Officers.
(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) Options granted at $9.50 and $7.31 per share were repriced at $4.94 per
share on April 7, 1998. Options granted at $6.88 per share were repriced at
$3.63 per share on December 15, 1998.
75
<PAGE> 80
OPTION EXERCISES AND HOLDINGS
The table below sets forth information concerning the exercise of options
during the 1997 fiscal year and unexercised options held by the Named Officers
as of the end of such year. No stock appreciation rights were exercised by the
Named Officers during such fiscal year or were outstanding at the end of that
year.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
SHARES AGGREGATE OPTIONS AT FY-END OPTIONS AT FY-END($)(2)
ACQUIRED ON VALUE REALIZED --------------------------- ---------------------------
NAME EXERCISE ($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Michael R. Henson......... 57,800 $386,963 33,867 113,333 $186,269 $ 623,332
Edward A. McDonald........ 0 0 0 50,000 0 275,000
Dana P. Nickell........... 22,000 140,500 6,000 58,000 33,000 319,000
Jeffrey F. O'Donnell...... 0 0 50,000 195,000 275,000 1,072,500
Jeffrey H. Thiel.......... 0 0 0 108,000 0 594,000
Claire K. Walker.......... 0 0 16,333 50,667 89,832 278,669
</TABLE>
- ---------------
(1) Based on the deemed fair value (as determined by the Board) for options
exercised prior to the initial public offering, less the exercise price
payable for such shares
(2) Based on the fair market value of the Company's Common Stock at year-end,
$5.50 per share, less the exercise price payable for such shares.
MANAGEMENT CONTRACTS AND CHANGE IN CONTROL AGREEMENTS
Except for CVD's Chief Executive Officer, Jeffrey O'Donnell, none of the
Named Officers have employment agreements with CVD. In November 1998, CVD
entered into an employment agreement with Jeffrey O'Donnell. The term of the
agreement is two years, which is extended by one day on each day of the term so
that the remaining term is always two years. Under the agreement, Mr. O'Donnell
is employed as President and Chief Executive Officer of the company and will
receive a base salary of $220,000 per year. The base salary will be reviewed
annually by the Compensation Committee of the Board of Directors. Mr. O'Donnell
also is eligible to participate in incentive compensation plans of CVD and will
be entitled to earn a bonus of up to 35% of his base salary. Under the
agreement, CVD may terminate Mr. O'Donnell. If such termination is without
cause, Mr. O'Donnell is entitled to receive a severance amount equal to his
then-current base salary payable for the remainder of the term and all of his
stock options will continue to vest for two years following the date of such
termination. If Mr. O'Donnell voluntarily resigns, and provides at least six
months notice of such resignation, all of his options shall continue to vest for
one year following the date of termination. In the event of any termination in
which he is eligible to receive severance payments, Mr. O'Donnell will, during
the period of payment of the severance payments, render such consulting services
CVD may request from time to time. In addition, the agreement provides that in
the event of a change of control or acquisition of CVD during the term of his
employment, all his options shall vest in full. In December 1998, Mr. O'Donnell
resigned as Chief Executive Officer, for family reasons, effective March 1999.
In connection with such resignation, Mr. O'Donnell is not entitled to any
severance benefits under his employment agreement. Mr. O'Donnell's options shall
continue to vest in accordance with their terms during his continuing service as
a director.
Michael Henson will enter into an employment agreement with CVD, as
described in Proposal No. 1 -- Employment Agreements.
The employment of each of the other Named Officers may be terminated at any
time at the discretion of the Board of Directors.
76
<PAGE> 81
OFFICER LOANS
On June 15, 1996, CVD extended a loan in the amount of $150,000, to Jeffrey
F. O'Donnell, the Company's President and Chief Operating Officer. The note was
secured by a second deed of trust on Mr. O'Donnell's home and has a five-year
term with interest compounding semi-annually at 6%. Mr. O'Donnell paid the loan
in full on January 22, 1998. On September 16, 1996, the Company extended an
interest free loan to Michael R. Henson, the Company's President and Chief
Executive Officer, in the amount of $175,000. The Company secured the note by a
deed of trust on certain real property owned by Mr. Henson. Mr. Henson paid the
loan in full on August 19, 1997. On January 24, 1997, the Company extended a
loan in the amount of $100,000 to Jeffrey H. Thiel, the Company's Vice President
of Operations. The note was secured by a second deed of trust on Mr. Thiel's
home and has 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.
DIRECTOR COMPENSATION
Each non-employee director of CVD receives a base fee of $1,000 per quarter
and additional fees of $1,000 for each Board of Directors meeting attended and
$500 for each committee meeting attended.
STOCKHOLDER APPROVAL
The affirmative vote of a majority of the shares of the Company's
outstanding voting stock present or represented by proxy at the Special Meeting
and entitled to vote on Proposal No. 3 is required for approval to amend the
Option Plan. If such stockholder approval is not obtained, then the share
reserve will not be increased.
RECOMMENDATION OF THE BOARD OF DIRECTORS
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR THE APPROVAL OF
THE AMENDMENT TO THE 1996 STOCK OPTION/STOCK ISSUANCE PLAN.
DEADLINE FOR RECEIPT OF
STOCKHOLDER PROPOSALS FOR 1999 ANNUAL MEETING
Any Stockholder desiring to submit a proposal for action at the 1999 Annual
Meeting of Stockholders should arrange for such proposal to be delivered to CVD
at its principal place of business no later than December 16, 1998, in order to
be considered for inclusion in CVD's proxy statement relating to that meeting.
Matters pertaining to such proposals, including the number and length thereof,
the eligibility of persons entitled to have such proposals included and other
aspects are regulated by the Securities Exchange Act of 1934, Rules and
Regulations of the SEC and other laws and regulations.
On May 21, 1998 the SEC adopted an amendment to Rule 14a-4, as promulgated
under the Securities and Exchange Act of 1934, as amended. The amendment to Rule
14a-4(c)(1) governs CVD's use of its discretionary proxy voting authority with
respect to a stockholder proposal which is not addressed in CVD's proxy
statement. The new amendment provides that if a proponent of a proposal fails to
notify CVD at least 45 days prior to the month and day of mailing of the prior
year's proxy statement, then CVD will be allowed to use its discretionary voting
authority when the proposal is raised at the meeting, without any discussion of
the matter in the proxy statement.
With respect to CVD's 1999 Annual Meeting of Stockholders, if CVD is not
provided notice of a stockholder proposal, which the stockholder has not
previously sought to include in CVD's proxy statement, by March 1, 1998, CVD
will be allowed to use its voting authority as outlined.
77
<PAGE> 82
INDEPENDENT AUDITORS
The firm of Ernst & Young LLP serves as independent auditors for CVD for
the current fiscal year and served for the fiscal year ended December 31, 1997.
A representative of Ernst & Young LLP is expected to be present at the Special
Meeting to respond to stockholders' questions, and that representative will be
given an opportunity to make a brief presentation to the stockholders if he or
she so desires and will be available to respond to appropriate questions. CVD
has been advised by Ernst & Young LLP that neither that firm nor any of its
associates has any material relationship with CVD nor any affiliate of CVD.
OTHER MATTERS
At the time of the preparation of this Proxy Statement, the Board of
Directors knows of no other matter which will be acted upon at the Special
Meeting. If any other matter is presented properly for action at the Special
Meeting or at any adjournment or postponement thereof, it is intended that the
proxies will be voted thereto in accordance with the best judgment and in the
discretion of the proxy holders.
By Order of the Board of Directors,
CARDIOVASCULAR DYNAMICS, INC.
[SIG]
Stephen R. Kroll
Secretary
Irvine, California
December 17, 1998
78
<PAGE> 83
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
CardioVascular Dynamics, Inc.
We have audited the accompanying consolidated balance sheets of
CardioVascular Dynamics, Inc. and subsidiaries as of December 31, 1996 and 1997,
and the related consolidated statements of operations, stockholders' equity (net
capital deficiency) and cash flows for each of the three years in the period
ended December 31, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
CardioVascular Dynamics, Inc. and subsidiaries at December 31, 1996 and 1997,
and the consolidated results of its operations and its cash flows for each of
the three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Orange County, California
January 29, 1998
F-1
<PAGE> 84
CARDIOVASCULAR DYNAMICS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- SEPTEMBER 30,
1996 1997 1998
-------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Current Assets:
Cash and cash equivalents................................. $ 17,192 $ 6,141 $ 3,627
Marketable securities available-for-sale.................. 25,733 24,773 23,301
Accounts receivable, net of allowance for doubtful
accounts of $377, $500 and $521, respectively........... 2,268 2,752 2,204
Other accounts receivable................................. 320 282 327
Inventories............................................... 2,899 3,205 2,334
Other current assets...................................... 162 163 296
-------- -------- --------
Total current assets............................... 48,574 37,316 32,089
Property and Equipment:
Furniture and equipment................................... 1,161 1,871 2,208
Leasehold improvements.................................... 310 322 324
-------- -------- --------
1,471 2,193 2,532
Less accumulated depreciation and amortization............ (289) (643) (995)
-------- -------- --------
Net property and equipment................................ 1,182 1,550 1,537
Goodwill, net of amortization of $78 and $219,
respectively............................................ -- 1,809 2,288
Notes receivable from officers............................ 325 273 127
Other assets.............................................. 3 413 251
-------- -------- --------
Total assets....................................... $ 50,084 $ 41,361 $ 36,292
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses..................... $ 2,382 $ 3,488 $ 3,132
Deferred license revenue.................................. -- -- 400
Deferred distributorship fee revenue, current portion..... 50 -- --
-------- -------- --------
Total current liabilities.......................... 2,432 3,488 3,532
Deferred distributorship fee revenue........................ 29 -- --
Minority interest........................................... -- -- 910
Commitments and contingencies
Stockholders' equity:
Convertible Preferred Stock, $.001 par value; 7,560,000
shares authorized, no shares issued and outstanding..... -- -- --
Common Stock, $.001 par value; 30,000,000 shares
authorized, 9,004,000, 9,389,000 and 9,533,000 shares
issued and outstanding at December 31, 1996 and 1997 and
September 30, 1998, respectively........................ 9 9 10
Additional paid-in capital................................ 58,869 60,371 60,679
Deferred compensation..................................... (376) (634) (469)
Accumulated deficit....................................... (11,049) (19,821) (25,014)
Treasury stock, at cost, no shares, 345,000, and 686,000
common shares, respectively............................. -- (2,205) (3,675)
Unrealized gain on available-for-sale securities.......... 170 176 164
Unrealized exchange rate (loss) gain...................... -- (23) 155
-------- -------- --------
Total stockholders' equity......................... 47,623 37,873 31,850
-------- -------- --------
Total liabilities and stockholders' equity......... $ 50,084 $ 41,361 $ 36,292
======== ======== ========
</TABLE>
See accompanying notes.
F-2
<PAGE> 85
CARDIOVASCULAR DYNAMICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------ ------------------
1995 1996 1997 1997 1998
------- ------- -------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
Sales................................. $ 3,462 $ 8,384 $ 11,332 $ 8,943 $ 7,031
License fee and other from related
party.............................. -- 150 -- -- 1,605
Contract.............................. 641 200 -- -- --
------- ------- -------- ------- -------
Total revenue................. 4,103 8,734 11,332 8,943 8,636
Operating costs and expenses:
Cost of sales......................... 2,051 4,111 6,418 4,392 4,339
Charge for acquired in-process
research and development........... 488 2,133 -- -- --
Research and development.............. 1,683 3,582 7,041 3,507 5,038
Marketing and sales................... 1,526 3,358 6,691 4,838 3,801
General and administrative (including
$340 and $156 for the years ended
December 31, 1995 and 1996,
respectively, paid to
EndoSonics)........................ 1,331 1,548 2,179 1,265 1,855
Minority interest..................... -- -- -- -- (68)
------- ------- -------- ------- -------
Total operating costs and
expenses.................... 7,079 14,732 22,329 14,002 14,965
------- ------- -------- ------- -------
Loss from operations.................. (2,976) (5,998) (10,997) (5,059) (6,329)
Other Income (expense):
Interest income....................... 42 1,324 2,201 1,727 1,202
Distributorship fees and other income
(expense).......................... 60 50 24 79 (66)
------- ------- -------- ------- -------
Total other income............ 102 1,374 2,225 1,806 1,136
------- ------- -------- ------- -------
Net Loss................................ $(2,874) $(4,624) $ (8,772) $(3,253) $(5,193)
======= ======= ======== ======= =======
Basic and diluted net loss per share
(pro forma through June 1996)......... $ (0.71) $ (0.69) $ (0.96) $ (0.36) $ (0.59)
======= ======= ======== ======= =======
Shares used in computing basic and
diluted net loss per share (pro forma
through June 1996).................... 4,052 6,755 9,118 9,098 8,857
======= ======= ======== ======= =======
</TABLE>
See accompanying notes.
F-3
<PAGE> 86
CARDIOVASCULAR DYNAMICS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL
------------------- -------------------- PAID-IN DEFERRED ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION DEFICIT
---------- ------ ----------- ------ ---------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994...... -- $-- 4,000,000 $ 4 $ 4,835 $ -- $ (3,551)
Additional effects of merger with
EndoSonics Acquisition Corp...... -- -- -- -- 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)
---------- --- ----------- --- ------- ----- --------
Balance at December 31, 1995...... 2,000,000 2 -- -- 5,670 (345) (6,425)
Sale of Preferred Stock to
EndoSonics....................... 400,000 -- -- -- 8,000 -- --
Conversion of Preferred Stock..... (2,400,000) (2) 4,800,000 5 (3) -- --
Exercise of Common Stock
Options.......................... -- -- 139,000 -- 138 -- --
Initial Public Offering of Common
Stock............................ -- -- 3,910,000 4 42,764 -- --
Deferred compensation resulting
from grant of options............ -- -- -- -- 150 (150) --
Amortization of deferred
compensation..................... -- -- -- -- -- 119 --
Acquisition of Intraluminal
Devices, Inc..................... -- -- 93,000 -- 1,400 -- --
Conversion of $750,000 debit by
Fukuda Denshi.................... -- -- 62,000 -- 750 -- --
Net loss.......................... -- -- -- -- -- -- (4,624)
Unrealized gain on investments.... -- -- -- -- -- -- --
---------- --- ----------- --- ------- ----- --------
Balance of December 31, 1996...... -- -- 9,004,000 9 58,869 (376) (11,049)
Exercise of Common Stock
Options.......................... -- -- 208,000 -- 238 -- --
Employee stock purchase plan...... -- -- 33,000 -- 266 -- --
SCIMED warrant exercise........... -- -- 120,000 -- 377 -- --
Sale of Common Stock to Cathex.... -- -- 25,000 -- 200 -- --
Expense repayment by Intraluminal
Devices, Inc. by transfer and
cancellation of common stock..... -- -- (1,000) -- (16) -- --
Deferred compensation resulting
from grant of options............ -- -- -- -- 437 (437) --
Amortization of deferred
compensation..................... -- -- -- -- -- 179 --
Treasury Common Stock............. -- -- -- -- -- -- --
Net Loss.......................... -- -- -- -- -- -- (8,772)
Unrealized gain on investments.... -- -- -- -- -- -- --
Unrealized exchange rate loss..... -- -- -- -- -- -- --
---------- --- ----------- --- ------- ----- --------
Balance at December 31, 1997...... -- -- 9,389,000 9 60,371 (634) (19,821)
Exercise of Common Stock
Options(*)....................... -- -- 94,000 1 112 -- --
Employee stock purchase plan(*)... -- -- 50,000 -- 180 -- --
Deferred compensation resulting
from grant of options(*)......... -- -- -- -- 16 (16) --
Amortization of deferred
compensation(*).................. -- -- -- -- -- 181 --
Treasury Common Stock(*).......... -- -- -- -- -- -- --
Net loss(*)....................... -- -- -- -- -- -- (5,193)
Unrealized loss on
investments(*)................... -- -- -- -- -- -- --
Unrealized exchange rate
gain(*).......................... -- -- -- -- -- -- --
---------- --- ----------- --- ------- ----- --------
Balance at September 30,
1998(*).......................... -- $-- 9,533,000 $10 $60,679 $(469) $(25,014)
========== === =========== === ======= ===== ========
<CAPTION>
TOTAL
STOCKHOLDERS
TREASURY UNREALIZED UNREALIZED EQUITY
------------------ GAIN ON EXCHANGE (NET CAPITAL
SHARES AMOUNT INVESTMENTS RATE LOSS DEFICIENCY)
-------- ------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1994...... -- $ -- $ -- $ -- $ 1,288
Additional effects of merger with
EndoSonics Acquisition Corp...... -- -- -- -- 488
Issuance of Preferred Stock in
exchange for Common Stock........ -- -- -- -- --
Deferred compensation resulting
from grant of options............ -- -- -- -- --
Net loss.......................... -- -- -- -- (2,874)
-------- ------- ---- ---- -------
Balance at December 31, 1995...... -- -- -- -- (1,098)
Sale of Preferred Stock to
EndoSonics....................... -- -- -- -- 8,000
Conversion of Preferred Stock..... -- -- -- -- --
Exercise of Common Stock
Options.......................... -- -- -- -- 138
Initial Public Offering of Common
Stock............................ -- -- -- -- 42,768
Deferred compensation resulting
from grant of options............ -- -- -- -- --
Amortization of deferred
compensation..................... -- -- -- -- 119
Acquisition of Intraluminal
Devices, Inc..................... -- -- -- -- 1,400
Conversion of $750,000 debit by
Fukuda Denshi.................... -- -- -- -- 750
Net loss.......................... -- -- -- -- (4,624)
Unrealized gain on investments.... -- -- 170 -- 170
-------- ------- ---- ---- -------
Balance of December 31, 1996...... -- -- 170 -- 47,623
Exercise of Common Stock
Options.......................... -- -- -- -- 238
Employee stock purchase plan...... -- -- -- -- 266
SCIMED warrant exercise........... -- -- -- -- 377
Sale of Common Stock to Cathex.... -- -- -- -- 200
Expense repayment by Intraluminal
Devices, Inc. by transfer and
cancellation of common stock..... -- -- -- -- (16)
Deferred compensation resulting
from grant of options............ -- -- -- -- --
Amortization of deferred
compensation..................... -- -- -- -- 179
Treasury Common Stock............. 345,000 (2,205) -- -- (2,205)
Net Loss.......................... -- -- -- -- (8,772)
Unrealized gain on investments.... -- -- 6 -- 6
Unrealized exchange rate loss..... -- -- -- (23) (23)
-------- ------- ---- ---- -------
Balance at December 31, 1997...... 345,000 (2,205) 176 (23) 37,873
Exercise of Common Stock
Options(*)....................... -- -- -- -- 113
Employee stock purchase plan(*)... -- -- -- -- 180
Deferred compensation resulting
from grant of options(*)......... -- -- -- -- --
Amortization of deferred
compensation(*).................. -- -- -- -- 181
Treasury Common Stock(*).......... 341,000 (1,470) -- -- (1,470)
Net loss(*)....................... -- -- -- -- (5,193)
Unrealized loss on
investments(*)................... -- -- (12) -- (12)
Unrealized exchange rate
gain(*).......................... -- -- -- 178 178
-------- ------- ---- ---- -------
Balance at September 30,
1998(*).......................... 686,000 $(3,675) $164 $155 $31,850
======== ======= ==== ==== =======
</TABLE>
- ---------------
(*) Unaudited
See accompanying notes.
F-4
<PAGE> 87
CARDIOVASCULAR DYNAMICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------- --------------------
1995 1996 1997 1997 1998
------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating activities:
Net loss..................................... $(2,874) $ (4,624) $ (8,772) $ (3,253) $ (5,193)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization................ 74 182 432 248 359
Amortization of deferred compensation........ -- 119 179 93 190
Bad debt expense............................. 249 221 318 36 190
Charge for acquired in-process research and
development................................ 488 1,400 -- -- --
Minority interest in losses of Radiance...... -- -- -- -- (68)
Net changes in:
Trade accounts receivable, net............... (639) (1,372) (2,767) (433) 359
Receivable from related parties.............. 125 -- -- -- --
Inventories.................................. (704) (2,145) 10 (1,229) 871
Other assets................................. (135) (671) 37 (154) (161)
Accounts payable and accrued expenses........ 1,369 698 836 (2,483) (322)
Deferred revenue............................. (54) (50) (79) (29) 400
------- -------- -------- -------- --------
Net cash used in operating activities.......... (2,101) (6,242) (9,806) (7,204) (3,375)
Investing activities:
Purchase of available-for-sale securities.... -- (25,563) (43,208) (31,518) (32,444)
Sales of available-for-sale securities....... -- -- 44,174 24,474 33,904
Capital expenditures for furniture, fixtures
and equipment.............................. (443) (940) (699) (515) (311)
Purchase of controlling interest in Radiance,
net of cash acquired....................... -- -- -- -- 577
Purchase of Clintec, net of cash acquired.... -- -- (30) (30) --
Change in other assets....................... -- -- (358) (187) 80
------- -------- -------- -------- --------
Net cash (used in) provided by investing
activities................................... (443) (26,503) (121) (7,776) 1,806
Financing activities:
Proceeds from issuance of convertible
obligation................................. 750 -- -- -- --
Proceeds from sale of Common Stock........... -- 42,768 466 436 180
Proceeds from exercise of stock warrants..... -- -- 377 390 --
Proceeds from exercise of stock options...... -- 138 238 204 112
Proceeds from sale of Preferred Stock to
EndoSonics................................. -- 8,000 -- -- --
Proceeds from repayment of affiliate debt.... -- -- -- -- 233
Purchase of treasury common stock............ -- -- (2,205) (1,450) (1,470)
Payable to EndoSonics, net................... (17) (2,537) -- -- --
------- -------- -------- -------- --------
Net cash provided by (used in) financing
activities................................... 733 48,369 (1,124) (420) (945)
------- -------- -------- -------- --------
Net (decrease) increase in cash................ (1,811) 15,624 (11,051) (15,400) (2,514)
Cash and cash equivalents, beginning of
period....................................... 3,379 1,568 17,192 17,192 6,141
------- -------- -------- -------- --------
Cash and cash equivalents, end of period....... $ 1,568 $ 17,192 $ 6,141 $ 1,792 $ 3,627
======= ======== ======== ======== ========
Supplemental disclosure of non-cash
financing activities:
Common stock issued upon the acquisition of
Intraluminal Devices, Inc., Note 1........... $ -- $ 1,400 $ -- $ -- $ --
Conversion of Debentures to Common Stock, Note
5............................................ -- 750 -- -- --
</TABLE>
See accompanying notes.
F-5
<PAGE> 88
CARDIOVASCULAR DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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 design, develop, manufacture and market proprietary
therapeutic catheters and stents used to treat certain vascular diseases.
In June 1992, EndoSonics Corporation ("EndoSonics") 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.) (hereinafter referred to as "CVD" or the "Company").
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 4), 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, amounts are
not necessarily indicative of the future charges to be incurred by CVD.
In 1994 and 1996, the Board of Directors of CVD approved a 16,200-for-1 and
a 2-for-1 Common Stock split, respectively, which has been reflected
retroactively for all periods in the accompanying financial statements.
On June 25, 1996, the Company closed its initial public offering (the
"Offering") which consisted of 3,400,000 shares of Common Stock at $12.00 per
share. On July 17, 1996, the Company's underwriters exercised their
overallotment option to purchase an additional 510,000 shares of Common Stock at
$12.00 per share. CVD received net offering proceeds from the sale of Common
Stock of approximately $42.8 million after deducting underwriting discounts and
commissions and other expenses of the Offering.
In October 1996, CVD acquired 100% of the common stock of Intraluminal
Device, Inc. ("IDI") in exchange for CVD common stock valued at $1.4 million.
The acquisition was accomplished through the formation of IDI Acquisition, Inc.,
a wholly-owned subsidiary of CVD, and the merging of IDI into IDI Acquisition,
Inc. (See Note 2).
F-6
<PAGE> 89
CARDIOVASCULAR DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
In July 1997, CVD acquired all of the common stock of Clinitec GmbH
("Clinitec") its independent distributor in Germany and Switzerland, in exchange
for the assumption of the assets and liabilities of Clinitec.
In September 1998, CVD exercised a warrant to purchase 1,500,000 shares of
Radiance Series B Preferred Stock at $0.975 per share or $1.5 million and
attained a controlling of Radiance.
The consolidated financial statements for December 31, 1996 and 1997 and
September 30, 1997 and 1998 include the accounts of the Company and its
subsidiaries. Intercompany transactions have been eliminated.
Unaudited Interim Financial Information
The financial information at September 30, 1998 and for the nine months
ended September 30, 1997 and 1998 is unaudited but includes all adjustments
(consisting only or normal recurring adjustments) which the Company considers
necessary for a fair presentation of the financial position at such date and the
operating results and cash flows for those periods. Results for the nine month
period ended September 30, 1998 are not necessarily indicative of results that
may be expected for the year ending December 31, 1998 or any other period.
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.
Cash and Cash Equivalents
Cash and cash equivalents includes cash on hand, demand deposits, and
short-term investments with original maturities of three months or less.
Marketable Securities Available-For-Sale
The Company accounts for its investments pursuant to Statement of Financial
Accounting Standards No. 115, Accounting for Certain Investments in Debt and
Equity Securities ("SFAS No. 115").
The Company has classified its entire investment portfolio as
available-for-sale. Available-for-sale securities are stated at fair value with
unrealized gains and losses included in stockholders' equity. The amortized cost
of debt securities is adjusted for amortization of premiums and accretions of
discounts to maturity. Such amortization is included in interest income.
Realized gains and losses are included in other income (expense). The cost of
securities sold is based on the specific identification method.
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 seven years.
F-7
<PAGE> 90
CARDIOVASCULAR DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Accounting for the Costs of Computer Software Developed for or Obtained for
Internal Use
In March 1998, the AICPA issued SOP 98-1, Accounting for the Costs of
Computer Software Developed for or Obtained for Internal Use ("SOP"). The SOP is
effective beginning January 1, 1999 and requires the capitalization of certain
costs incurred after the date of adoption in connection with developing or
obtaining software for internal use. The Company currently expenses such costs,
and it anticipates that the impact of the SOP will not be material on its
results of operations or financial position for the foreseeable future as
amounts expended to develop or obtain software have not been and are not
expected to be material.
Goodwill
The excess of the purchase price over the net assets of the business
acquired ("goodwill") is amortized on the straight-line method over the
estimated recovery period. The goodwill stemming from the purchase of Clinitec
and a controlling interest in Radiance $1.9 million and $0.5 million is
amortized over ten and seven years, respectively. Upon the completion of an
independent appraisal of intangible assets acquired in the purchase of a
controlling interest in Radiance, the $0.5 million recorded as goodwill may
subsequently be reclassified or expensed relating, primarily, to its treatment
as developed research and development or acquired in-processed research and
development. (See Note 2.)
Long-lived Assets
In March 1995, Statement of Financial Accounting Standards No. 121,
Accounting for the Impairment of Long-lived Assets to be Disposed of, was issued
("SFAS No. 121"). SFAS No. 121 requires that long-lived assets and certain
identifiable intangibles to be held and used or disposed of by an entity be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. During 1996, the
Company adopted this statement and has determined that no impairment loss need
be recognized for the applicable assets for 1996 and 1997 and the first nine
months of 1998.
Concentrations of Credit Risk and Significant Customers
The Company maintains its cash and cash equivalents in deposit accounts and
in pooled investment accounts administered by a major financial institution.
The Company sells its products primarily to medical institutions and
distributors worldwide. The Company performs on going 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 1995, 1996 and 1997 product sales to Fukuda Denshi Co., Ltd.,
("Fukuda"), the Company's Japanese distributor (see Note 5), comprised 18%, 14%
and 7% of total revenue, respectively. Accounts receivable from Fukuda
represented 1% and 0% of net accounts receivable at December 31, 1996 and 1997,
respectively.
The Company terminated its Agreement with Fukuda in May 1997 and signed a
five-year agreement with another Japan distributor, Cathex, LTD. ("Cathex").
During 1997 and the first nine months of 1998, Product sales to Cathex comprised
13% and 17%, respectively, of total revenues. Accounts receivable from Cathex
represented 44% and 7% of net accounts receivable at December 31, 1997 and
September 30, 1998, respectively.
Product sales to Medtronic, Inc. ("Medtronic") accounted for 21% and 13% of
total revenues during 1996 and 1997, respectively. At December 31, 1996 and
1997, 27% and 0%, respectively, of net accounts receivable were due from
Medtronic. In May of 1997, Medtronic advised the Company of its election to not
F-8
<PAGE> 91
CARDIOVASCULAR DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
make minimum purchases of product for the second year of the agreement. In June
1997, Medtronic informed CVD it would not fulfill its commitment for the first
year of the agreement and it did not believe it was required to fulfill such
commitment.
In June of 1998, the Company signed a technology license agreement with
Guidant Corporation ("Guidant"), an international interventional cardiology
products company, to grant them the ability to manufacture and distribute
products using the Company's focal technology. During the nine month period
ended September 30, 1998, CVD recognized license fees from Guidant of $1.6
million, which represented 19% of total revenues. (See Note 6.)
One other 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>
YEAR ENDED DECEMBER 31,
--------------------------
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
Europe........................................... $1,179 $1,614 $3,020
Japan............................................ 744 1,240 2,350
Latin America.................................... 131 243 253
Other............................................ 417 956
------ ------ ------
$2,054 $3,514 $6,579
====== ====== ======
</TABLE>
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. License revenues are
recognized on a contract with SCIMED Life Systems, Inc. ("SCIMED") when
distribution rights to certain markets are made available to SCIMED for the sale
of products based upon certain limited catheter technology. License revenues are
recognized on a contract with Guidant Corporation based upon the achievement of
milestones involving the transfer of technology to Guidant and royalties based
upon the sale of products using the Focal technology (See Note 6). Contract
revenues are recognized on contracts with SCIMED and Advanced CardioVascular
Systems, Inc. ("ACS") for transferring certain limited catheter technology based
upon the Company's completion of (1) technical Assistance to aid SCIMED in
manufacturing the related products, and (2) research and development to develop
the related products for ACS and SCIMED (See Note 3).
Accounting for Stock-Based Compensation
The Company has elected to follow Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees ("APB 25") and related
Interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under
Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation ("SFAS No. 123"), requires use of option valuation models that were
not developed for use in valuing employee stock options. Under the provisions of
APB 25, the Company has not recognized compensation expense since the exercise
price of the Company's employee stock options equals the market price of the
underlying stock on the date of grant.
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123, which also requires that the information be determined
as if the Company has accounted for its employee stock
F-9
<PAGE> 92
CARDIOVASCULAR DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
options granted subsequent to December 31, 1994 under the fair value method of
that Statement. The fair value for these options was estimated at the date of
grant using the Black-Scholes option pricing model. The Black-Scholes model was
developed for use in estimating the fair value of traded options which have no
vesting restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the expected
stock price volatility. Because the Company's employee stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its employee
stock options.
In calculating pro forma information regarding net income and net income
per share the fair value was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions for the options on the Company's Common Stock: risk-free interest
rate of 6.0%, 6.0 % and 5.5%; a dividend yield of 0%, 0% and 0%; volatility of
the expected market price of the Company's common stock of 0.475, 0.475 and
0.692; and a weighted-average expected life of the options of 3.5, 3.5 and 5.0
years for 1995, 1996 and 1997, respectively.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information for the years ended December 31, 1995, 1996 and 1997
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Pro forma net loss............................ $(2,905) $(5,170) $(9,320)
Pro forma net loss per share.................. $ (0.72) $ (0.77) $ (1.02)
</TABLE>
Because SFAS No. 123 is applicable only to options granted subsequent to
December 31, 1994, its pro forma effect will not be fully reflected until 1997.
Reporting Comprehensive Income
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive Income ("SFAS
No. 130"), which is effective for years beginning after December 15, 1997. SFAS
No. 130 establishes standards for reporting and displaying comprehensive income
and its components with the same prominence as other financial statement
information. For the periods ending September 30, 1998 and 1997, the changes in
the components of comprehensive income were not materially different than the
reported net loss.
Disclosures about Segments of an Enterprise and Related Information
For the year beginning January 1, 1998, the Company adopted Statement of
Financial Accounting Standards No. 131, Disclosures about Segments of an
Enterprise and Related Information ("SFAS No. 131"). SFAS No. 131 establishes
standards for the way that public business enterprises report selected
information about operating segments in annual and interim financial statements.
However, as the Company operates in one business segment, no additional interim
reporting is required under SFAS No. 131.
Income Taxes
From June 1993 until June 1996, 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.
F-10
<PAGE> 93
CARDIOVASCULAR DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Net Loss Per Share
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
Earnings per Share. ("SFAS No. 128") replaced the calculation of primary and
fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. All earnings per share amounts for all periods have been
presented to conform with SFAS No. 128.
Net loss per common share is computed using the weighted average number of
common shares outstanding during the periods presented. Options to purchase
shares of the Company's common stock granted under the Company's stock option
plan may have a dilutive effect on the Company's earnings per share in the
future. The following table sets forth the computation of basic and diluted net
loss per share:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
----------------------------- ------------------
1995 1996 1997 1997 1998
------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Numerator:
Net loss....................... $(2,874) $(4,624) $(8,772) $(3,253) $(5,193)
Net loss used for basic and
diluted loss per share......
------- ------- ------- ------- -------
Loss attributable to common
stockholders................ $(2,874) $(4,624) $(8,772) $(3,253) $(5,193)
======= ======= ======= ======= =======
Denominator:
Denominator for basic and
diluted loss per share......
------- ------- ------- ------- -------
Weighted average common shares
outstanding................. 4,052 6,755 9,118 9,098 8,857
======= ======= ======= ======= =======
Basic and diluted net loss per
share.......................... $ (0.71) $ (0.69) $ (0.96) $ (0.36) $ (0.59)
======= ======= ======= ======= =======
</TABLE>
RECLASSIFICATIONS
To conform with the 1998, 1997 and 1996 financial statement presentation,
certain reclassifications have been made to the 1995 financial statements.
2. ACQUISITIONS
On October 16, 1996, the Company acquired all of the outstanding shares of
Intraluminal Devices, Inc. ("IDI") in exchange for approximately 93,000 shares
of CVD common stock valued at $1.4 million. The acquisition was accounted for
using the purchase method of accounting. As the assets of IDI were patents for
products still in their development stage, the purchase price and the associated
costs of acquisition $700 were expensed as acquired in-process research and
development.
On July 29, 1997, the Company acquired all of the common stock of its
independent distributor in Germany and Switzerland, Clinitec GmbH ("Clinitec").
The aggregate purchase price of the acquisition was $1.6 million and consisted
of cash of $30 and the forgiveness of debt of $1.6 million. The transaction was
accounted for by the purchase method of accounting and, accordingly, the
purchase price was allocated to the assets acquired and the liabilities assumed
based on their fair market values at the date of acquisition. In connection with
the acquisition, the Company acquired assets and assumed liabilities with fair
market values of $401 and $652, respectively. The excess of the purchase price
over the fair value of the net assets acquired
F-11
<PAGE> 94
CARDIOVASCULAR DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
of $1.9 million has been allocated to goodwill. The results of operations of
Clinitec are included in the consolidated statement of operations subsequent to
the date of acquisition.
In September 1998, the Company exercised warrants to purchase an additional
1,500,000 Preferred Series B shares in Radiance Medical Systems, Inc.
("Radiance") for $0.975 per share or a total of $1.5 million, bringing CVD's
ownership of the outstanding equity of Radiance to above 50%. Radiance was
incorporated in August 1997 to develop radiation products to treat restenosis
based on CVD's patented focal delivery systems technology. In consideration for
the granting by CVD of a license to this technology, Radiance issued to CVD
750,000 shares of Series B Preferred Stock, a warrant to purchase 1,500,000
shares of Series B Preferred Stock, rights of first offer with respect to the
commercialization of Radiance's products, and a promise to receive royalties on
sales of products based upon the licensed technology.
In November 1998, the Company signed a definitive merger agreement with
Radiance, whereby CVD will acquire all of the outstanding shares which it does
not already own, subject to the approval of the shareholders of both companies.
Under the terms of the agreement, on the effective date of the merger, CVD will
pay the shareholders of Radiance $3.00 for each share of Preferred Stock and
$2.00 for each share of Common Stock for a total consideration of approximately
$7.0 million, excluding the value of CVD stock options to be provided to
Radiance employees in exchange for their Radiance stock options. The 550,000
Radiance common stock options outstanding immediately prior to the closing of
the merger will accelerate, vest and be converted into an option to acquire
$2.00 of CVD Common Stock for an aggregate value of $1.1 million. In addition,
Radiance share and option holders may receive product development milestone
payments of $2.00 for each share of Preferred Stock and $3.00 for each share of
Common Stock. The aforementioned development milestone payments may be increased
up to 30%, or reduced or eliminated if the milestones are reached earlier or
later, respectively, than the milestone target dates. Lastly, the merger
consideration paid is subject to certain price adjustment and collar provisions
and, at CVD's option, CVD may pay up to 30% of the consideration due to Radiance
Preferred shareholders in cash.
The following table reflects unaudited pro forma combined results of
operations of the Company, IDI, Clinitec and Radiance on the basis that the
acquisitions had taken place and the related charge for IDI, noted above, was
recorded at the beginning of 1996 for IDI and Clinitec, as IDI operations were
not material to the Company's operations prior to 1996, and at the beginning of
1998 for Radiance, as Radiance operations were not material to the Company's
operations for the first nine months of 1997:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
1996 1997 SEPTEMBER 30, 1998
------- ------- ------------------
(UNAUDITED)
<S> <C> <C> <C>
Revenues....................................... $ 8,822 $11,633 $ 8,636
Net Loss....................................... (5,060) (9,484) (5,638)
Net Loss per common share...................... (0.75) (1.04) (0.64)
Shares used in computation..................... 6,755 9,118 8,857
</TABLE>
In management's opinion, the unaudited pro forma combined results of
operations are not indicative of the actual results that would have occurred had
the acquisitions been consummated at the beginning of 1996, 1997 or 1998,
respectively, or of future operations of the combined companies under the
ownership and management of the Company.
3. 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. CVD also granted
SCIMED an exclusive license to certain patents in the
F-12
<PAGE> 95
CARDIOVASCULAR DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
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
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
80,000 shares of Series A Preferred Stock at an exercise price of $3.29 per
share in exchange for a waiver of SCIMED's anti-dilution right. The warrant
expires in September 1997.
During May 1996, the Company agreed to issue an additional warrant to
SCIMED to purchase up to 40,000 shares of Series A Preferred Stock at an
exercise price of $3.29 per share in exchange for a waiver of SCIMED's
anti-dilution right related to the shares to be issued under the 1996 Plan. In
August 1997, SCIMED exercised all 120,000 warrants, mentioned above.
SCIMED also paid CVD $641 and $200 in 1995 and 1996, respectively, on a
cost reimbursement basis to fund continuing development of the technology and
for other support.
4. RELATED PARTY TRANSACTIONS
The following is a summary of significant transactions between CVD and
EndoSonics:
During 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 1995 amount to $172.
Prior to the Company's initial public offering in June 1996, 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
$340 and $156 for the years ended December 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>
YEAR ENDED
DECEMBER 31,
-----------------
1995 1996
------ -------
<S> <C> <C>
Beginning balance......................................... $2,554 $ 2,537
Inventory purchases....................................... 172 --
Corporate cost allocations................................ 340 156
Cash disbursements made by EndoSonics on behalf of CVD.... 312 --
Cash collections made by EndoSonics on behalf of CVD...... (700) --
Cash payments to EndoSonics............................... -- (2,693)
Cash disbursements made by CVD on behalf of EndoSonics and
other................................................... (141) --
------ -------
Ending balance............................................ $2,537 $ --
====== =======
Average balance during period............................. $2,551 $ 1,974
====== =======
</TABLE>
In connection with the initial public offering, CVD and EndoSonics entered
into a Tax Allocation Agreement that provides, 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.
F-13
<PAGE> 96
CARDIOVASCULAR DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
EndoSonics and CVD had entered 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 became effective upon
the consummation of the initial public offering and terminated in the fourth
quarter of 1997 when EndoSonics beneficially owned less than 25% of CVD's Common
Stock. See also Notes 6 and 12.
5. AGREEMENTS WITH FUKUDA AND CATHEX
The Company had executed a distribution agreement with Fukuda. The
agreement provided 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 revenues received
from Fukuda were deferred and were being recognized as revenue over the initial
periods covered by the respective agreement.
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 converted into the right to receive
62,500 shares of Common Stock upon the consummation of the initial public
offering. In November, 1996, Fukuda exercised the conversion feature of said
obligation. In May 1997, the Company terminated the existing distribution
agreement and does not expect that any material obligations will arise as a
result of such termination.
The Company entered into a distribution agreement, dated May 1, 1997, with
Cathex, Ltd. (The "Cathex Agreement"), whereby Cathex served as CVD's exclusive
distributor for certain of the Company's products in Japan. In exchange for this
exclusive distributorship, Cathex shareholders agreed to purchase $200 in CVD
common stock or approximately 25,000 shares, in addition to payments owing upon
the purchase of the products Cathex also agreed to undertake all necessary
clinical trails to obtain approval from Japanese regulator authorities for the
sale of the products in Japan. Cathex's purchases under the Cathex Agreement are
subject to certain minimum requirements. The initial term of the Cathex
Agreement expires on January 1, 2001, subject to a five-year extension. The
Cathex Agreement may also be terminated in the event of breach upon 90 days
notice by the non-breaching party, subject to cure within the notice period.
6. LICENSE AGREEMENTS
Advanced CardioVascular Systems, Inc.
In January 1995 the Company entered into a license agreement with Advanced
CardioVascular Systems, Inc. ("ACS"), a subsidiary of Guidant Corporation, under
which the Company acquired the exclusive worldwide rights to ACS' SmartNeedle
technology. The Company assumed 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 was
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 year ended December 31, 1996. In February
1997, ACS elected to terminate the perfusion technology agreement.
Endosonics Corporation
The Company 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
F-14
<PAGE> 97
CARDIOVASCULAR DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
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.
Guidant Corporation
In June of 1998, the Company signed a technology license agreement with
Guidant Corporation, an international interventional cardiology products
company, to grant them the ability to manufacture and distribute stent delivery
products using the Company's focal technology. Under the Agreement, the Company
is entitled to receive certain milestone payments based upon the transfer of the
technology to Guidant, and royalty payments based upon the sale of products
using the focal technology. An initial license payment of $2.0 million was
received by the Company upon the signing of the Agreement. Based upon the
completion of certain initial technology transfer milestones, the Company
recognized $1.2 million and $1.6 million in license revenue in the third quarter
and first nine months of 1998, respectively, and will recognize the remaining
$400 of deferred license revenue in future periods. In October of 1998, the
Company received another $1.0 million license milestone payment upon the
completion of the technology transfer to Guidant.
7. MARKETABLE SECURITIES AVAILABLE-FOR-SALE
The Company's investments in debt securities are diversified among high
credit quality securities in accordance with the Company's investment policy.
The Company's investment portfolio is managed by a major financial institution.
The following is a summary of investments in debt securities classified as
current assets and available-for-sale at December 31, 1996 and 1997 and June 30,
1998.
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
---------------------------------------------------------------
1996 1997
------------------------------ ------------------------------
GROSS GROSS
UNREALIZED UNREALIZED
HOLDING HOLDING
(LOSSES) FAIR (LOSSES) FAIR
COSTS GAINS VALUE COST GAINS VALUE
------- ---------- ------- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury and other
agencies debt
securities.............. $10,000 $(19) $ 9,981 $ 4,976 $ 30 $ 5,006
Corporate debt
securities.............. 15,563 189 15,752 19,621 146 19,767
Foreign government debt
securities.............. -- -- -- -- -- --
------- ---- ------- ------- ---- -------
$25,563 $170 $25,733 $24,597 $176 $24,773
======= ==== ======= ======= ==== =======
</TABLE>
All short-term investments at December 31, 1996 were due within one year.
At December 31, 1997, one investment with a fair value of approximately $2.0
million was due in February 1999, other short-term investments were due within
one year.
F-15
<PAGE> 98
CARDIOVASCULAR DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
8. INVENTORIES
Inventories are stated at the lower of cost, determined on an average cost
basis, or market value. Inventories consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------- SEPTEMBER 30,
1996 1997 1998
------ ------ -------------
(UNAUDITED)
<S> <C> <C> <C>
Raw materials...................................... $1,015 $1,285 $ 866
Work in process.................................... 510 165 234
Finished goods..................................... 1,374 1,755 1,234
------ ------ ------
$2,899 $3,205 $2,334
====== ====== ======
</TABLE>
9. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------- SEPTEMBER 30,
1996 1997 1998
------ ------ -------------
(UNAUDITED)
<S> <C> <C> <C>
Account payable.................................... $ 750 $1,374 $1,274
Accrued payroll and related expenses............... 1,040 1,317 791
Accrued clinical studies........................... 290 548 658
Other accrued expenses............................. 302 249 409
------ ------ ------
$2,382 $3,488 $3,132
====== ====== ======
</TABLE>
10. COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases its administrative, research and manufacturing
facilities and certain equipment under long-term, noncancellable 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, 1997:
<TABLE>
<S> <C>
1998........................................................ $429
1999........................................................ 213
2000........................................................ 80
2001........................................................ 8
----
$730
====
</TABLE>
Rental expense charged to operations for all operating leases during the
years ended December 31, 1995, 1996 and 1997, was approximately $171, $365 and
$574, respectively.
11. STOCKHOLDER'S 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
F-16
<PAGE> 99
CARDIOVASCULAR DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Company issued 400,000 shares of Series B Preferred Stock to EndoSonics at
$20.00 per share for aggregate proceeds of $8.0 million.
The preferred stockholders converted their shares to common shares upon the
consummation of the Company's initial public offering.
Stock Option Plan
In May 1996, the Company, adopted the 1996 Stock Option/Stock Issuance Plan
(the "1996 Plan") which is the successor to the Company's 1995 Stock Option
Plan. Under the terms of the 1996 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, a determined
by the Board of Directors. The Company has authorized 2,190,000 shares of Common
Stock for issuance under the 1996 Plan. At December 31, 1997, the Company had
48,000 shares of Common Stock available for grant under the 1996 Plan. The
options granted under the 1996 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.
<TABLE>
<CAPTION>
OPTION PRICE NUMBER OF
PER SHARE SHARES
--------------- ---------
<S> <C> <C>
Balanced at December 31, 1994............................ $ 1.00 462,000
Granted.................................................. $1.00 to $ 1.50 494,000
Exercised................................................ $ -- --
Forfeited................................................ $ -- --
Cancelled................................................ $ -- --
--------------- ---------
Balanced at December 31, 1995............................ $1.00 to $ 1.50 956,000
Granted.................................................. $2.50 to $13.25 346,000
Exercised................................................ $1.00 to $ 1.50 (138,600)
Forfeited................................................ $1.00 to $13.25 (18,875)
Cancelled................................................ $ -- --
--------------- ---------
Balance at December 31, 1996............................. $1.00 to $13.25 1,144,525
Granted.................................................. $5.00 to $ 9.50 985,000
Exercised................................................ $1.00 to $ 2.50 (208,259)
Forfeited................................................ $1.00 to $13.25 (196,479)
Cancelled................................................ $ 6.87 (130,000)
--------------- ---------
Balance at December 31, 1997............................. $1.00 to $ 9.50 1,594,787
=============== =========
</TABLE>
On April 21, 1997, the Board of Directors approved repricing of the options
granted on August 5, 1996 at $13.25 per share and on November 4, 1996 at $12.50
per share. As a result of the repricing, the exercise price became $6.88 and the
vesting period on the aforementioned options started anew.
F-17
<PAGE> 100
CARDIOVASCULAR DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
The following table summarizes information regarding stock options
outstanding at December 31, 1997:
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE OPTIONS
OPTIONS REMAINING WEIGHTED- EXERCISABLE WEIGHTED-
RANGE OF OUTSTANDING CONTRACTUAL AVERAGE AT AVERAGE
EXERCISE PRICES AT 12/31/97 LIFE EXERCISE PRICE 12/31/97 EXERCISE PRICE
- --------------- ----------- ----------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$1.00 - $1.50 505,287 7.5 $1.25 242,912 $1.22
2.50 - 9.50 1,089,500 9.4 7.23 25,292 6.96
--------- -------
1.00 - 9.50 1,594,787 8.8 5.33 268,204 1.76
========= =======
</TABLE>
As of December 31, 1996 and 1997, 253,525 and 268,204 options were
exercisable, respectively.
The weighted-average grant-date fair value of options granted during 1995,
1996 and 1997, for options where the exercise price on the date of grant was
equal to the stock price on that date, was $0.40, $5.12, and $4.50,
respectively. The weighted-average grant-date fair value of options granted
during 1995, 1996 and 1997, for options where the exercise price on the date of
grant was less than the stock price on that date, was $1.44, $3.16, and $0,
respectively.
During 1996, the Company recorded deferred compensation of approximately
$150 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 $437 of deferred compensation was recorded to recognize compensation
for non-employee option grants during the year ended December 31, 1997. Deferred
compensation is being amortized over the vesting period of the related options.
$119 and $179 of deferred compensation was amortized in the years ended December
31, 1996 and 1997, respectively.
Stock Purchase Plan
Under the terms of the Company's 1996 Employee Stock Purchase Plan (the
"Purchase Plan"), eligible employees can 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. A total of 200,000 shares of Common Stock are reserved for issuance
under the Purchase Plan. During 1997, a total of approximately 33,000 shares, of
Common Stock was purchased at an average price of $8.18 per share.
F-18
<PAGE> 101
CARDIOVASCULAR DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
12. INCOME TAXES
Significant components of the Company's deferred tax assets are as follows
at December 31:
<TABLE>
<CAPTION>
1996 1997
---------------- ------------------
FEDERAL STATE FEDERAL STATE
------- ----- ------- -------
<S> <C> <C> <C> <C>
Net operating loss carryforward.............. $ 1,792 $ 44 $ 3,899 $ 60
Accrued expenses............................. 456 78 346 59
Research and development credits............. 256 144 521 291
Bad debt reserve............................. 132 23 175 30
Depreciation................................. 52 9 (48) (8)
Inventory write-downs........................ 51 9 385 66
Capitalized research and development......... -- 276 -- 642
Deferred revenue............................. 28 5 -- --
Other........................................ 47 47 163 28
------- ----- ------- -------
Gross deferred tax assets.................... 2,814 645 5,441 1,168
Valuation allowance.......................... (2,814) (645) (5,441) (1,168)
Total deferred tax assets.................... -- -- -- --
------- ----- ------- -------
Net deferred tax assets...................... $ -- $ -- $ -- $ --
======= ===== ======= =======
</TABLE>
The valuation allowance increased by $3,150 and $1,569 in 1997 and 1996,
respectively.
The Company's effective tax rate differs from the statutory rate of 35% due
to federal and state losses which were recorded without tax benefit.
At December 31, 1997, the Company has net operating loss carryforwards for
federal and state income tax purposes of approximately $11.0 million and $1.0
million, respectively, which expire in the years 1998 through 2010. In addition,
the Company has research and development tax credits for federal and state
income tax purposes of approximately $520 and $320, respectively, which expire
in the years 2008 through 2011.
Because of the "change of ownership" provision of the Tax Reform Act of
1986, utilization of the Company's net operating loss and research credit
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.
13. EMPLOYEE BENEFIT PLAN
The Company provides a 401(k) Plan for all employees 21 years of age or
older with over 3 months of service. Under the 401(k) Plan, eligible employees
voluntarily contribute to the Plan up to 15% of their salary through payroll
deductions. Employer contributions may be made by the Company at its discretion
based upon matching employee contributions, within limits, and profit sharing
provided for in the Plan. No employer contributions were made in 1996 and 1997.
14. SUBSEQUENT AND SIGNIFICANT EVENTS
In October 1998, the Company signed a letter of intent to sell its Vascular
Access Business Unit to Escalon Medical Corporation. Under the terms of the
letter of intent, CVD will receive an initial payment upon the signing of an
agreement to sell the business, a milestone payment upon the transferring of the
assets and technology, and royalty payments upon the sale of products for a
five-year period following the execution of the agreement. The sale is subject
to various conditions, including the negotiation and execution of a definitive
sale agreement.
F-19
<PAGE> 102
CARDIOVASCULAR DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
In July 1996, the Company and Medtronic, Inc. ("Medtronic") entered into a
written OEM agreement ("Agreement") pursuant to which Medtronic was to purchase
certain angioplasty balloon catheters and related components from the Company.
In May 1997, Medtronic advised the Company of its election to not make minimum
purchases of product for the second year of the Agreement. This dispute
adversely affected the Company's financial results for the quarter and
nine-month period ended September 30, 1997 and the three and nine-month periods
ended September 30, 1998.
F-20
<PAGE> 103
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors
Radiance Medical Systems, Inc.
We have audited the accompanying accompanying balance sheet of Radiance
Medical Systems, Inc. (a Development Stage Company) as of December 31, 1997 and
the related statements of operations, stockholder's equity and accumulated
deficit, and cash flows for the period from August 15, 1997 (inception) to
December 31, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our 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 Radiance Medical Systems,
Inc. at December 31, 1997, and the results of its operations and its cash flows
for the period from August 15, 1997 (inception) to December 31, 1997, in
conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Orange County, California
May 8, 1998
F-21
<PAGE> 104
RADIANCE MEDICAL SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------ -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash........................................................ $1,422 $ 2,407
Prepaid expenses and other current assets................... 18 33
------ -------
Total current assets.............................. 1,440 2,440
Furniture and Equipment:
Machinery and equipment................................... 6 13
Computers and equipment................................... 10 19
------ -------
16 32
Less accumulated depreciation............................... (1) (6)
------ -------
Net property and equipment................................ 15 26
------ -------
Total assets...................................... $1,455 $ 2,466
====== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 19 $ 60
Accrued liabilities....................................... 20 165
Amounts due to Cardiovascular Dynamics.................... 51 25
------ -------
Total current liabilities......................... 90 250
Deferred liability.......................................... -- 400
Commitments and contingencies (Note 5)
Stockholders' equity:
Convertible Preferred Stock, $.001 par value;
Authorized shares -- 20,000,000
Redeemable Series A:
Liquidation preference -- $1,511,855
Issued and outstanding shares -- 2,325,930 at December
31, 1997 and September 30, 1998....................... 2 2
Series B:
Issued and outstanding -- 750,000 and 2,250,000 at
December 31, 1997 and September 30, 1998,
respectively.......................................... 1 2
Common Stock, $.001 par value;
Authorized shares -- 30,000,000
Issued and outstanding shares -- none and 305,000 at
December 31, 1997 and September 30, 1998,
respectively.......................................... -- --
Additional paid-in capital................................ 1,493 2,984
Deferred compensation..................................... -- (15)
Deficit accumulated during the development stage.......... (131) (1,157)
------ -------
Total stockholders' equity........................ 1,365 1,816
------ -------
Total liabilities and stockholders' equity........ $1,455 $ 2,466
====== =======
</TABLE>
See accompanying notes.
F-22
<PAGE> 105
RADIANCE MEDICAL SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
AUGUST 15, 1997 NINE MONTHS
(INCEPTION) TO ENDED
DECEMBER 31, 1997 SEPTEMBER 30, 1998
----------------- ------------------
(UNAUDITED)
<S> <C> <C>
Operating expenses:
Research and development.................................. $ 131 $ 1,025
General and administrative................................ 18 45
----- -------
Loss from operations........................................ (149) (1,070)
Interest income............................................. 19 44
----- -------
Loss before income taxes.................................... (130) (1,026)
Provision for income taxes.................................. 1 --
----- -------
Loss before income taxes.................................... $(131) $(1,026)
===== =======
</TABLE>
See accompanying notes.
F-23
<PAGE> 106
RADIANCE MEDICAL SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
SERIES A REDEEMABLE SERIES B DEFICIT
CONVERTIBLE CONVERTIBLE ACCUMULATED
PREFERRED STOCK PREFERRED STOCK COMMON STOCK ADDITIONAL DEFERRED DURING THE
-------------------- ------------------ ---------------- PAID-IN- COMPEN- DEVELOPMENT
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL SATION STAGE
---------- ------- --------- ------ ------- ------ ---------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Convertible preferred
stock issued on
September 4, 1997 in
exchange for licenses
and patents............. -- $-- 750,000 $ 1 -- $-- $ -- $ -- $ --
Convertible preferred
stock issued on
September 10, 1997 for
cash, net of offering
costs of $15,400........ 2,326,000 2 -- -- -- 1,493 -- --
Net loss.................. -- -- -- -- -- -- -- -- (131)
--------- --- --------- --- ------- --- ------ ---- -------
Balance at December 31,
1997.................... 2,326,000 2 750,000 1 -- -- 1,493 -- (131)
Common stock issued on
June 1, 1998 as officer
compensation(*)......... -- -- -- -- 300,000 -- 9 (9) --
Common stock issued(*).... -- -- -- -- 5,000 -- -- -- --
Preferred series B shares
issued on warrant
exercise(*)............. -- -- 1,500,000 1 -- -- 1,461 -- --
Deferred compensation
resulting from option
grants(*)............... -- -- -- -- -- -- 20 (20) --
Amortization of deferred
compensation(*)......... -- -- -- -- -- -- -- 14 --
Net loss(*)............... -- -- -- -- -- -- -- -- (1,026)
--------- --- --------- --- ------- --- ------ ---- -------
Balance at September 30,
1998(*)................. 2,326,000 $ 2 2,250,000 $ 2 305,000 $-- $2,984 $(15) $(1,157)
========= === ========= === ======= === ====== ==== =======
<CAPTION>
TOTAL
-------
<S> <C>
Convertible preferred
stock issued on
September 4, 1997 in
exchange for licenses
and patents............. $ --
Convertible preferred
stock issued on
September 10, 1997 for
cash, net of offering
costs of $15,400........ 1,496
Net loss.................. (131)
-------
Balance at December 31,
1997.................... 1,365
Common stock issued on
June 1, 1998 as officer
compensation(*)......... --
Common stock issued(*).... --
Preferred series B shares
issued on warrant
exercise(*)............. 1,463
Deferred compensation
resulting from option
grants(*)............... --
Amortization of deferred
compensation(*)......... 14
Net loss(*)............... (1,026)
-------
Balance at September 30,
1998(*)................. $ 1,816
=======
</TABLE>
- ---------------
(*) Unaudited
See accompanying notes.
F-24
<PAGE> 107
RADIANCE MEDICAL SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
AUGUST 15, 1997 NINE MONTHS
(INCEPTION) TO ENDED
DECEMBER 31, 1997 SEPTEMBER 30, 1998
----------------- ------------------
(UNAUDITED)
<S> <C> <C>
Operating activities:
Net loss................................................... $ (131) $(1,026)
Adjustments to reconcile net loss to cash used in operating
activities:
Depreciation and amortization............................ 1 20
Changes in operating assets and liabilities:
Prepaid expenses and other current assets............. (18) (15)
Accounts payable...................................... 18 41
Accrued expenses...................................... 20 545
Amounts due to Cardiovascular Dynamics................ 51 118
------ -------
Net cash used in operating activities...................... (59) (317)
Investing Activities:
Purchases of furniture and equipment..................... (16) (16)
------ -------
Net cash used in investing activities...................... (16) (16)
Financing activities:
Proceeds from warrant exercise for preferred series B
shares................................................ -- 1,462
Payment of debt to affiliate............................. -- (144)
Net proceeds from issuance of redeemable convertible
preferred stock....................................... 1,497 --
------ -------
Net cash provided by financing activities.................. 1,497 1,318
------ -------
Increase in cash........................................... 1,422 985
Cash at beginning of period................................ -- 1,422
------ -------
Cash at end of period...................................... $1,422 $ 2,407
====== =======
</TABLE>
See accompanying notes.
F-25
<PAGE> 108
RADIANCE MEDICAL SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
1. BUSINESS, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Business and Basis of Presentation
Radiance Medical Systems, Inc. (formerly Radiis, Inc.) (the Company) was
incorporated on August 15, 1997 in the State of Delaware. The Company's current
activities include research and development of products used in the delivery of
radiation therapy to the body and the use of facilitated force technology to
treat diseases of the cardiovascular system.
To December 31, 1997 and September 30, 1998 the Company has not generated
revenues and has incurred net losses of $131 and $1.0 million, respectively.
Successful completion of the Company's development program and achieving of
profitable operations is dependent upon the company continuing to obtain
financing to support its operations. Through September 30, 1998 the Company has
financed its operations through the issuance of preferred stock totaling, net of
issuance costs, $3.0 million. The Company plans to continue funding its
operations through private placements of equity securities in 1998. The Company
estimates these funds will be sufficient to support working capital until
profitable operations are achieved, but that if not, operations can be scaled
back to ensure the Company's ability to continue as a going concern.
Unaudited Interim Financial Information
The financial information at September 30, 1998 and for the nine months
then ended is unaudited but includes all adjustments (consisting only or normal
recurring adjustments) which the Company considers necessary for a fair
presentation of the financial position at such date and the operating results
and cash flows for those periods. Results for the nine month period ended
September 30, 1998 are not necessarily indicative of results that may be
expected for the year ending December 31, 1998 or for any other period.
Use of Estimates
The preparation of the financial statement 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 statement and the reported amounts of revenues and
expenses during the reported period. Actual results could differ from those
estimates.
Furniture and Equipment
Furniture and equipment, consisting primarily of office furnishings and
computer equipment, are stated at cost. Depreciation is provided using the
straight-line method based on the estimated useful lives of the related assets,
generally three to five years, for furniture, computers and equipment.
Stock Based Compensation
The Company has elected to follow Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees and related interpretations in
accounting for its employee stock options because the alternative fair value
accounting provided for under SFAS No. 123, Accounting for Stock-Based
Compensation, requires use of option valuation models that were not developed
for use in valuing employee stock options. Through December 31, 1997 and
September 30, 1998, the expenses associated with both employee and non-employee
stock based compensation was not material.
F-26
<PAGE> 109
RADIANCE MEDICAL SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Year 2000 (Unaudited)
The Company is in the process of determining that all of its software
products are year 2000 compliant and what actions are required if any products
are not year 2000 compliant. Management expects its existing internal system to
be year 2000 compliant by the end of 1998. The Company does not anticipate
incurring any costs which will have a significant effect on the Company's
reported financial position.
Income Taxes
The Company uses the liability method of accounting for income taxes as set
forth in Statement of Financial Accounting Standards No. 109, Accounting for
Income Taxes ("SFAS No. 109"). Under the liability method, deferred tax
liabilities and assets are determined based on the difference between financial
statement and tax bases of assets and liabilities using enacted tax rates in
effect for the year in which the difference are expected to reverse. Deferred
tax assets are recognized and measured based on the likelihood of realization of
the related tax benefit in the future.
2. CARDIOVASCULAR DYNAMICS
License Agreement
In September 1997, the Company entered into a license agreement with CVD
and issued 750,000 shares of Series B Convertible Preferred Stock and a warrant
to purchase 1,500,000 shares of Series B Convertible Preferred stock. The
Company obtained an exclusive worldwide license, subject to certain existing
license agreements, to among other things design, develop, manufacture and sell
products for the delivery of radiation therapy to the body and the use of
facilitated force technology to treat diseases of the cardiovascular system. The
Company is required to make quarterly royalty payments to the affiliated company
at 7% of net sales of licensed products. At a minimum, the Company is required
to remit royalty payments aggregating $500 to the affiliated company by January
1, 2005. In addition, commencing March 15, 1998, the Company began paying
special minimum royalties of $3 quarterly through December 31, 1999. The license
agreement expires at the later of the expiration of all licensed patents or
twenty years.
Merger Agreement
In September 1998, CVD exercised the aforementioned warrant to purchase
1,500,000 Preferred Series B shares in Radiance Medical Systems, Inc.
("Radiance") for $0.975 per share or a total of $1.5 million, bringing CVD's
ownership of the outstanding equity of Radiance to approximately 50 percent.
In November 1998, the Radiance signed a definitive merger agreement with
CVD, whereby CVD will acquire all of the outstanding shares which it does not
already own, subject to the approval of the shareholders of both companies.
Under the terms of the agreement, on the effective date of the merger, CVD will
pay the shareholders of Radiance $3.00 for each share of Preferred Stock and
$2.00 for each share of Common Stock for a total consideration of approximately
$7.0 million, excluding the value of CVD stock options to be provided to
Radiance employees in exchange for their Radiance stock options. The Radiance
common stock options outstanding immediately prior to the closing of the merger
will accelerate, vest and be converted into an option to acquire $2.00 of CVD
Common Stock. In addition, Radiance share and option holders may receive product
development milestone payments of $2.00 for each share of Preferred Stock and
$3.00 for each share of Common Stock. The aforementioned development milestone
payments may be increased up to 30%, or reduced or eliminated if the milestones
are reached earlier or later, respectively, than the milestone target dates.
F-27
<PAGE> 110
RADIANCE MEDICAL SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
3. STOCKHOLDER'S EQUITY
Convertible Preferred Stock
Holders of Series A Redeemable Convertible Preferred stock are entitled to
receive dividends as and when declared by the Board of Directors and have
preference over holders of Common or Series B Convertible Preferred stock. The
preferred shareholders have voting rights equal to those of holders of the
common stock, which is one vote for each share owned. At any time on or after
September 10, 2003 and at the request of the holders of at least two-thirds of
the outstanding Series A Redeemable Convertible Preferred stock, the Company
will redeem the outstanding Series A Redeemable Convertible Preferred stock at
$0.65 per share plus any declared but unpaid dividends over a period not to
exceed two years from the date of request. At any time prior to redemption, the
holders of the Series A Redeemable Convertible and Series B Convertible
Preferred stock may convert any or all of their shares of preferred stock to
common stock at a one for one conversation rate, subject to certain adjustments.
In addition, the Series A Redeemable Convertible Preferred stock will be
automatically converted into Common stock at the then applicable conversation
rate, subject to certain adjustments. In addition, the Series A Redeemable
Convertible Preferred stock will be automatically converted into Common stock at
the then applicable conversion rate, in the event of a underwritten public
offering of Common stock of not less than $8 million. The Series A Redeemable
Convertible Preferred stockholders have a liquidation preference of $0.65 per
share or the amount they would have received had they converted the Series A
Redeemable Convertible Preferred to common stock immediately prior to such
liquidation or winding up.
The Series B Convertible Preferred stockholders have no right of redemption
and have liquidation preferences over holders of Common Stock.
Warrant
The warrant issued to the Series B Redeemable Convertible shareholder
affiliate, CVD, would have expired forty-eight months after the closing date of
the Series A financing, August 8, 1997, and provided for the option to purchase
up to 1,500,000 shares of Series B Redeemable Convertible Preferred stock at a
price equal to the lesser of $2.05 per share or 150 percent of the per share
price paid by the investors in the most recent Company financing. In September,
1998, the warrant was exercised at 150 percent of the $0.65 per share price paid
by investors in the most recent Company financing or $0.975 per share for a
total cost of $1.5 million.
Stock Option Plan
The Company's Incentive Stock Option Plan (the Plan) provides for the
issuance to employees, officers, directors, consultants and business associates
of up to 1,000,000 shares of Common Stock through the grant of stock options or
issuance of Common Stock. The options generally have terms of approximately ten
years and generally vest over four years. The Common Stock issuances generally
will be restricted and vest over four years.
F-28
<PAGE> 111
RADIANCE MEDICAL SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
The following table summarized the Company's stock option activity for the
period of August 15, 1997 (inception) to September 30, 1998.
<TABLE>
<CAPTION>
NUMBER OF OPTION PRICE
SHARES PER SHARE
--------- ------------
<S> <C> <C>
Balance at August 15, 1997 (inception)...................... -- --
Granted..................................................... 225,000 $0.07
Cancelled................................................... (10,000) $0.07
--------- -----
Balance at December 31, 1997................................ 245,000 $0.07
--------- -----
Granted(*).................................................. 315,000 $0.07
Cancelled(*)................................................ -- --
--------- -----
Balance at September 30, 1998(*)............................ 560,000 $0.07
========= =====
Weighted average remaining contractual life................. 9.7 years
Weighted average fair value of options granted at grant
date...................................................... $0.03
</TABLE>
- ---------------
(*) Unaudited
As of September 30, 1998, 16,000 options were exercisable and 125,000
shares of Common Stock were available for grant under the Plan.
In calculating pro forma net loss, as required by SFAS No. 123, the fair
value was estimated at the date of grant using the minimum value option pricing
model with the following weighted-average assumptions for the options on the
Company's Common Stock: risk-free interest rate of 5.47%; a dividend yield of
0%; volatility of the expected market price of the Company's Common Stock of 0;
and a weighted-average expected life of the option of 10 years.
In management's opinion, existing stock option valuation models do not
provide a reliable single measure of the fair value of employee stock options
that have vesting provisions and are not transferable. For purposes of pro forma
disclosures, the estimated fair value of the options is amortized to expense
over the options' vesting period. Pro forma net loss for the period August 15,
1997 (inception) to December 31, 1997, and for the nine months ended September
30, 1998 is $131 and $1,026, respectively.
On June 1, 1998, the Company issued 300,000 shares of restricted common
stock as the sole compensation for the services of the chief executive officer
for the following twelve-month period. The officer's interest in the shares
vests, and the Company's right to buy unvested shares lapses, over a four-year
period from the date of issue. Unless there is a change in control of the
Company prior to such date, the Company retains the right to repurchase any
unvested shares at $0.065 per share during the ninety-day period following the
officer's termination of services.
4. RELATED PARTY TRANSACTION
During the period from August 15, 1997 (inception) to December 31, 1997 and
for the nine months ended September 30, 1998, Cardiovascular Dynamics, a
shareholder of the Company, incurred certain administrative and accounting
expenses aggregating $51 and $118, respectively, on behalf of the company, and
the Company owed $51 and $25 for these services at December 31, 1997 and
September 30, 1998, respectively.
F-29
<PAGE> 112
RADIANCE MEDICAL SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
5. COMMITMENTS AND CONTINGENCIES
The Company leases its facilities under noncancellable operating leases
which extend into the year 2000. Future minimum rentals under these leases as of
December 31, 1997 are as follows:
<TABLE>
<S> <C>
1998................................................... $13
1999................................................... 14
2000................................................... 14
---
$41
===
</TABLE>
Rent expense for the period of August 15, 1997 (inception) to December 31,
1997 was $4.
6. PROVISION FOR INCOME TAXES
Deferred income taxes reflect the net tax effect of temporary difference
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. At December 31, 1997, the
Company had net deferred tax assets of approximately $56, respectively, which
consists primarily of net operating loss carryforwards. A valuation allowance
has been recorded to offset the entire amount of the net deferred tax assets.
At December 31, 1997, for federal and state income tax purposes, the
Company had net operating loss carryforwards of approximately $130, and $65,
respectively, that will begin to expire in the year 2002.
F-30
<PAGE> 113
ANNEX I
AGREEMENT AND PLAN OF MERGER
<PAGE> 114
AGREEMENT AND PLAN OF MERGER
This AGREEMENT AND PLAN OF MERGER, dated as of November 3, 1998 (this
"Agreement") is made and entered into by and among CardioVascular Dynamics,
Inc., a Delaware corporation ("CVD"), CVD/RMS Acquisition Corp., a Delaware
corporation and wholly-owned subsidiary of CVD ("Sub"), and Radiance Medical
Systems, Inc., a Delaware corporation ("Radiance")
WHEREAS, the Board of Directors of each of CVD, Sub and Radiance believes
it to be desirable and in the best interests of CVD, Sub and Radiance and each
of their respective stockholders to merge Radiance with and into Sub (the
"Merger"); and
WHEREAS, CVD, Sub and Radiance desire to make certain representations,
warranties and agreements in connection with the Merger and also to prescribe
various conditions to the Merger;
NOW, THEREFORE, in consideration of the mutual covenants and agreements set
forth in this Agreement, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
ARTICLE 1
THE MERGER
1.1 The Merger. At the Effective Time (as defined in Section 1.2), upon
the terms and subject to the conditions set forth in this Agreement, Radiance
shall be merged with and into Sub in accordance with the provisions of the
Delaware General Corporation Law (the "DGCL"). Sub shall be the surviving
corporation in the Merger (the "Surviving Corporation"). Sub and Radiance are
sometimes referred to herein as the "Constituent Corporations." As a result of
the Merger, each outstanding share of capital stock of Radiance shall be
canceled and converted into the right to receive the Merger Consideration, in
the manner provided in Article 2 hereof.
1.2 Effective Time. At the Closing (as defined in Section 1.3), a
certificate of merger (the "Certificate of Merger") shall be executed by the
parties hereto and filed with the Secretary of State of the State of Delaware
(the "Secretary of State"). The Merger shall become effective at the time of
filing of the Certificate of Merger (the "Effective Time").
1.3 Closing. The closing of the Merger (the "Closing") shall take place at
the offices of Stradling Yocca Carlson & Rauth, 660 Newport Center Drive, Suite
1600, Newport Beach, California 92660, at 10:00 a.m. on the date all of the
conditions set forth herein have been satisfied or waived in accordance with
this Agreement (the "Closing Date"). At the Closing, CVD, Sub and Radiance shall
deliver the certificates and other documents and instruments required to be
delivered hereunder.
1.4 Certificate of Incorporation and Bylaws of the Surviving
Corporation. At the Effective Time: (i) the Certificate of Incorporation of Sub
as in effect immediately prior to the Effective Time shall be the Certificate of
Incorporation of the Surviving Corporation until thereafter amended; and (ii)
the Bylaws of Sub as in effect immediately prior to the Effective Time shall be
the Bylaws of the Surviving Corporation until thereafter amended.
1.5 Directors and Officers of the Surviving Corporation. The directors and
officers of Sub immediately prior to the Effective Time shall be the directors
and officers of the Surviving Corporation from and after the Effective Time,
until their successors shall have been duly elected or appointed and qualified
or until their earlier death, resignation or removal in accordance with the
Surviving Corporation's Certificate of Incorporation and Bylaws.
1.6 Effects of the Merger. Subject to the foregoing, the effects of the
Merger shall be as provided in the applicable provisions of the DGCL.
1.7 Further Assurances. Each party hereto shall execute such further
documents and instruments and take such further actions as may reasonably be
requested by one or more of the others to consummate the
I-1
<PAGE> 115
Merger, to vest the Surviving Corporation with full title to all assets,
properties, rights, approvals, immunities and franchises of either of the
Constituent Corporations or to effect the other purposes of this Agreement.
1.8 Tax Treatment. The parties intend that the Merger be treated as a
reorganization described in Section 368(a)(1)(A) and 368(a)(2)(D) of the
Internal Revenue Code of 1986, as amended (the "Code").
ARTICLE 2
EXCHANGE OF SHARES
2.1 Exchange of Shares. At the Effective Time, by virtue of the Merger and
without any action on the part of the holders of the capital stock of Sub or
Radiance:
(a) Cancellation of Treasury Stock and Stock Owned by CVD. All shares of
capital stock owned by Radiance as treasury stock and all shares of capital
stock of Radiance owned by CVD or Sub shall be canceled and retired and shall
cease to exist and no stock of CVD or other consideration shall be delivered in
exchange therefor.
(b) Determination of Merger Consideration. Each issued and outstanding
share of Radiance common stock, $0.001 par value ("Radiance Common Stock"), and
each issued and outstanding share of Radiance Series A Preferred Stock, $0.001
par value ("Radiance Preferred Stock"), issued and outstanding immediately prior
to the Effective Time, except as otherwise provided in Section 2.1(a), shall be
converted into the right to receive the Merger Consideration as follows:
(i) Radiance Common Stock Merger Consideration. Each share of Radiance
Common Stock issued and outstanding immediately prior to the Effective
Time, without any action on the part of the holders thereof, shall be
entitled to receive: (A) that number of shares of CVD common stock, par
value $0.001 per share ("CVD Common Stock"), equal to Two Dollars ($2.00)
of CVD Common Stock (the "Common Primary Consideration"), as determined in
accordance with Section 2.1(b)(iii), below; (B) any Adjusted Additional
Consideration, as set forth in Section 2.1(b)(iv); and (C) any Milestone
Payments, as set forth in Section 2.1(b)(v) hereof. CVD shall pay all of
the Common Primary Consideration, and any Adjusted Additional Consideration
and Milestone Payments payable with respect to the Radiance Common Stock,
in the form of shares of CVD Common Stock.
(ii) Radiance Preferred Stock Merger Consideration. Each share of
Radiance Preferred Stock issued and outstanding immediately prior to the
Effective Time, without any action on the part of the holders thereof,
shall be entitled to receive: (A) that number of shares of CVD Common Stock
equal to Three Dollars ($3.00) of CVD Common Stock (the "Preferred Primary
Consideration"), as determined in accordance with Section 2.1(b)(iii),
below; (B) any Adjusted Additional Consideration, as set forth in Section
2.1(b)(iv) hereof; and (C) any Milestone Payments, as set forth in Section
2.1(b)(v) hereof. CVD may elect to pay a portion of such consideration in
cash, as set forth in Sections 2.1(b)(iii) and 2.1(c). The Common Primary
Consideration and the Preferred Primary Consideration are collectively
referred to as the "Primary Consideration," as applicable, and together
with any Adjusted Additional Consideration and any Milestone Payments, the
"Merger Consideration."
(iii) Value of Stock; Election of Radiance Stockholders; Form of
Consideration. By December 15, 1998, each Radiance Stockholder shall elect
either the method set forth in subsection 2.1(b)(iii)(A) below or
subsection 2.1(b)(iii)(B) below to value the shares of CVD Common Stock to
be received as part of the Primary Consideration. Any Radiance Stockholder
who fails to make such election shall receive shares of CVD Common Stock
valued as set forth in subsection 2.1(b)(iii)(B) below.
(A) The value of the CVD Common Stock issued as part of the Primary
Consideration shall be Three and 33/100 Dollars ($3.33) per share, which
is the average of the closing prices of CVD Common Stock as reported on
the Nasdaq National Market System ("Nasdaq") for the twenty trading days
ending on the trading day preceding the date hereof (the "Average
Signing Price"); provided, however, if the average of the closing prices
of CVD Common Stock as reported on the Nasdaq for the twenty trading
days ending on the trading day preceding the closing (the "Average
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Closing Price") shall be greater than Five Dollars ($5.00) or less than
Two Dollars ($2.00) such value shall be adjusted as follows:
(x) if the Average Closing Price is greater than $5.00, the
value of CVD Common Stock issued as part of the Primary Consideration
shall be a number equal to the Average Closing Price multiplied by a
fraction, the numerator of which is the Average Signing Price and the
denominator of which is $5.00; and
(y) if the Average Closing Price is less than $2.00, the value
of CVD Common Stock issued as part of the Primary Consideration shall
be a number equal to the Average Closing Price multiplied by a
fraction, the numerator of which is the Average Signing Price and the
denominator of which is $2.00.
In the event that the value of the CVD Common Stock is adjusted
pursuant to this Section 2.1(b)(iii)(x) or 2.1(b)(iii)(y), the adjusted
value shall be defined as the "Deemed Price."
(B) The value of the CVD Common Stock issued as part of the Primary
Consideration shall be the Average Closing Price.
In addition, in the event that the Average Closing Price is less
than Five Dollars ($5.00), CVD, at its option, subject to Section
2.1(d), may elect to pay up to thirty percent (30%) of the Primary
Consideration in cash, which cash shall be allocated in accordance with
and subject to the provisions of Section 2.1(c) (the "CVD Cash Amount").
For purposes of determining the CVD Cash Amount, each share of CVD
Common Stock which could be issued as part of the Primary Consideration
shall be valued, for Radiance stockholders electing the valuation method
of subsection 2.1(b)(iii)(B), at the Average Closing Price, and for
Radiance Stockholders electing the valuation method in subsection 2.1
(b)(iii)(A), at the Average Signing Price; provided, however, that if
the value of the CVD Common Stock is adjusted pursuant to this Section
2.1(b)(iii)(x) or 2.1(b)(iii)(y), the value of the CVD Common Stock
shall be at the Deemed Price.
(iv) Adjusted Additional Consideration. In the event that the
registration statement described in Section 6.2 below is declared effective
more than thirty (30) days after the Closing, and the closing price of CVD
Common Stock as reported on Nasdaq on the trading day immediately preceding
the effective date of the registration (the "Registration Date Price") of
the CVD Common Stock is less than the Average Closing Price, CVD shall pay
to each holder of Radiance Common Stock and Radiance Preferred Stock the
difference between the Average Closing Price and the Registration Date
Price per each share of CVD Common Stock issued to such holder pursuant to
Sections 2.1(b)(i) and 2.1(b)(ii) (the "Adjusted Additional
Consideration"). Any Adjusted Additional Consideration shall be paid by CVD
to the holders of Radiance Common Stock and Radiance Preferred Stock within
ten (10) days of the effective date of such registration, based upon the
Registration Date Price, and shall be payable: (A) with respect to Radiance
Preferred Stock, at CVD's option, in CVD Common Stock or cash, in
accordance with Sections 2.1(b)(iii) and 2.1(c) and subject to Section
2.1(d); and (B) with respect to Radiance Common Stock, shall be payable by
delivery of CVD Common Stock.").
(v) Milestone Payments. Upon completion by CVD, Sub or their
successors or assigns of the following milestones (each, a "Milestone")
related to beta emitting balloon catheters for the treatment or prevention
of restenosis, CVD shall pay within ten (10) days of achieving each
Milestone to each holder of Radiance Common Stock and Radiance Preferred
Stock and each person who held a Radiance Option immediately prior to the
Effective Time the following milestone payments (the "Milestone Payments"):
(A) $.4615 for each share of Radiance Common Stock (including
shares underlying Radiance Options ) and $.3079 for each share of
Radiance Preferred Stock, upon the approval of an IDE for the initiation
of human clinical trials in the United States by April 30, 1999;
(B) $.9231 for each share of Radiance Common Stock (including
shares underlying Radiance Options ) and $.6153 for each share of
Radiance Preferred Stock, upon CE Mark approval by June 30, 2000;
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(C) $.9231 for each share of Radiance Common Stock (including
shares underlying Radiance Options ) and $.6153 for each share of
Radiance Preferred Stock, upon acceptance by the FDA of a PMA filing in
the United States by September 30, 2000; and
(D) $.6923 for each share of Radiance Common Stock (including
shares underlying Radiance Options ) and $.4615 for each share of
Radiance Preferred Stock, upon PMA approval in the United States by
October 31, 2001;
provided, however, that each Milestone Payment will be increased by ten
percent (10%) for each thirty (30) day period that such Milestone is
achieved in advance of the respective achievement date, up to a maximum of
one hundred and thirty percent (130%) of such Milestone Payment, and each
Milestone Payment will be decreased by ten percent (10%) for each thirty
(30) day period that such Milestone is not achieved following the
respective achievement date. If a Milestone is not achieved on or before
one-hundred and twenty (120) days following the respective achievement
date, no payment shall be made with respect to such Milestone.
(vi) Acceleration on Change of Control. In the event of a "Change of
Control" of CVD, which is not approved by the CVD Board of Directors, all
Milestone Payments remaining to be earned shall be accelerated and payable
upon the Change of Control. In addition, in the event of any other Change
of Control, CVD shall cause the successor or acquiring entity to assume all
CVD's obligations hereunder, including the obligation to pay Milestone
Payments when due and to fund development as required by Section 6.9 of
this Agreement. For purposes hereof, "Change in Control" shall mean a
change in ownership or control of CVD and/or the Surviving Corporation, or
any successor thereto, effected through any of the following transactions:
(A) the acquisition, directly or indirectly, by any person or
related group of persons (other than CVD or a person that directly or
indirectly controls, is controlled by, or is under common control with,
CVD), of beneficial ownership (within the meaning of Rule 13d-3 of the
1934 Act) of securities possessing more than fifty percent (50%) of the
total combined voting power of CVD's outstanding securities pursuant to
a tender or exchange offer made directly to CVD's stockholders; or
(B) a change in the composition of the Board of Directors of CVD
over a period of thirty-six (36) consecutive months or less such that a
majority of the Board members ceases, by reason of one or more contested
elections for Board membership, to be comprised of individuals who
either (A) have been Board members continuously since the beginning of
such period or (B) have been elected or nominated for election as Board
members during such period by at least a majority of the Board members
described in clause (A) who were still in office at the time the Board
approved such election or nomination; or
(C) a merger or consolidation in which securities possessing more
than fifty percent (50%) of the total combined voting power of CVD's
and/or the Surviving Corporation's outstanding securities are
transferred to a person or persons different from the persons holding
those securities immediately prior to such transaction; or
(D) the sale, transfer or other disposition of all or substantially
all of CVD's and/or the Surviving Corporation's assets; or
(E) the acquisition, directly or indirectly, by any person or group
of related persons (other than CVD or a wholly-owned subsidiary of CVD)
of securities possessing more than fifty percent (50%) of the total
combined voting power of the Surviving Corporation's outstanding
securities.
(vii) Form and Payment of Milestone Payment. Each Milestone Payment
shall be payable in CVD Common Stock, valued at the average of the closing
prices of CVD Common Stock as reported on Nasdaq for the twenty (20)
trading days ending on the trading day preceding the day that a Milestone
is achieved (with respect to any particular Milestone, the "Average
Milestone Price"). If any Average Milestone Price is less than Five Dollars
($5.00), CVD, at its option, subject to Section 2.1(d), may pay
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up to thirty percent (30%) of such Milestone Payment in cash, which cash
shall be allocated in accordance with Section 2.1(c); provided, however,
that Milestone Payments with respect to Radiance Common Stock and Radiance
Options outstanding immediately prior to the Effective Time shall be made
only in shares of CVD Common Stock.
(viii) Adjustments for Recapitalizations, Etc. If prior to the payment
of the last Milestone Payment hereunder the outstanding shares of CVD
Common Stock shall have been changed into a different number of shares or
different class, by reason of a stock dividend, subdivision,
reclassification, recapitalization, split, combination or exchange of
shares, the Merger Consideration remaining to be paid shall be adjusted
correspondingly to reflect such stock dividend, subdivision,
reclassification, recapitalization, split, combination or exchange of
shares.
(ix) Potential Escrow of Milestone Payments. In the event CVD has
pending claims for CVD Indemnifiable Damages (as that term is defined in
Section 9.2(a)) made during the Indemnification Period, then all or a
portion of any subsequent Milestone Payments shall be deposited in escrow,
pursuant to the terms of an Escrow Agreement, substantially in the form of
Exhibit A (the "Escrow Agreement"), by and among CVD, Michael Henson as
representative of the Radiance Stockholders) (the "Representative")
[Southern California Bank], as escrow agent (the "Escrow Agent"). The total
amount of such Milestone Payments deposited shall not exceed the amount of
the then pending claims, with the CVD Common Stock valued at the applicable
Average Milestone Price as specified in Section 2.1(b)(vii). Any excess of
Milestone Payments over the amount of the then pending claims, and any
Milestone Payments payable at such time that no claims are pending, shall
be paid to the persons entitled thereto pursuant to Section 2.1(b)(v). Any
shares of CVD Common Stock included with the Milestone Payments that are
deposited into escrow shall be registered in the names of the holders,
immediately prior to the Effective Time, of Radiance Preferred Stock,
Radiance Common Stock and Radiance Options, but shall be held by the Escrow
Agent, such deposit to constitute an escrow fund to be governed by the
terms set forth herein and in the Escrow Agreement. The adoption and
approval of the Merger by the Radiance stockholders shall constitute
initial approval of the Escrow Agreement and of the appointment of Michael
Henson as the Representative.
(c) Optional Cash or Stock Election. In the event that CVD elects to pay a
portion of the Merger Consideration in cash, as set forth in Sections
2.1(b)(iii), 2.1(b)(iv) and 2.1(b)(vii), and subject to the allocation and
election procedure set forth in this Section 2.1(c), each record holder of
shares of Radiance Preferred Stock immediately prior to the Effective Time will
be entitled to elect to receive all or a portion of such Merger Consideration in
cash (a "Cash Election"). All such elections shall be made concurrently with the
election set forth in Section 2.1(b)(iii) on a form designed for that purpose
and shall indicate the percentage of the Merger Consideration such holder
desires to receive in cash. If the aggregate amount of cash to be paid by CVD at
the time of any payment is insufficient to satisfy all Cash Elections, such cash
shall be distributed among the holders of Radiance Preferred Stock, pro rata, in
accordance with the relative amounts of cash indicated by such Cash Election. To
the extent that the amount of cash to be paid by CVD exceeds the aggregate
amount indicated by such Cash Elections, all such Cash Elections shall be
satisfied and the remaining cash shall be distributed, to all holders of
Radiance Preferred Stock immediately prior to the Effective Time, pro rata,
based on the number of shares of Radiance Preferred Stock held by each such
holder immediately prior to the Effective Time. Any holder of Radiance Preferred
Stock who does not submit a Form of Election prior to the Effective Date shall
be deemed to have made an election to receive cash in a percentage equal to the
percentage of cash which CVD has elected to pay pursuant to Sections
2.1(b)(iii), 2.1(b)(iv) and 2.1(b)(vii).
(d) Limit on Payment of Cash Consideration. Notwithstanding any other
provision in this Agreement, in no event shall the total amount of cash to be
paid by CVD as a component of the Merger Consideration, including any cash paid
pursuant to Sections 2.2 and 2.3, exceed thirty percent (30%) of the total of
all of the Merger Consideration, valuing each share of CVD Common Stock for this
purpose at its fair market value on the date each share is payable hereunder,
which fair market value shall be the closing price of CVD Common Stock as
reported on Nasdaq on the trading day immediately preceding the payment date of
such share
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reduced by a reasonable discount for the shares that are not registered but are
subject to registration as provided in this Agreement, which discount shall be
determined by CVD in its reasonable judgment.
2.2 Dissenting Shares.
(a) Notwithstanding anything to the contrary in this Agreement, each share
of Radiance Common Stock and Radiance Preferred Stock issued and outstanding
immediately prior to the Effective Time that is held by any stockholder who has
not voted in favor of the Merger, has perfected such holder's right to an
appraisal of such holder's shares in accordance with the applicable provisions
of the DGCL and the California General Corporation Law ("CGCL"), as applicable,
and has not effectively withdrawn or lost such right to appraisal (a "Dissenting
Share"), shall not be converted into the right to receive the Merger
Consideration pursuant to Section 2.1(b), but shall be entitled only to such
rights as are granted by the applicable provisions of the DGCL and CGCL, as
applicable; provided, however, that any Dissenting Share held by a person at the
Effective Time who shall, after the Effective Time, withdraw the demand for
appraisal or lose the right of appraisal, in either case pursuant to the DGCL
and CGCL, as applicable, shall be deemed to be converted into, as of the
Effective Time, the right to receive the Merger Consideration pursuant to
Section 2.1(b).
(b) Radiance shall give CVD (i) prompt notice of any written demands for
appraisal, withdrawals of demands for appraisal and any other instruments served
pursuant to the applicable provision of the DGCL and CGCL, as applicable,
relating to the appraisal process received by Radiance and (ii) the opportunity
to direct all negotiations and proceedings with respect to demands for appraisal
under the DGCL and CGCL, as applicable, with the participation of Radiance.
Radiance will not voluntarily make any payment with respect to any demands for
appraisal and will not, except with the prior written consent of CVD, settle or
offer to settle any such demands.
2.3 Fractional Shares. No fractional shares of CVD Common Stock shall be
issued, but in lieu thereof each holder of shares of Radiance Common Stock,
Radiance Preferred Stock and Radiance Options who otherwise would be entitled to
receive a fraction of a share of CVD Common Stock (after aggregating all
fractional shares of CVD Common Stock to be received by such holder), shall
receive from CVD an amount of cash (rounded up to the nearest whole cent) equal
to the product of the fraction of a share of CVD Common Stock to which such
holder would otherwise be entitled, times the Average Closing Price.
2.4 Treatment of Radiance Options. Each Radiance Option shall accelerate
and vest immediately prior to the Closing and, to the extent not exercised at
the Closing, shall be assumed by CVD. Each Radiance Option to purchase one share
of Radiance Common Stock shall be converted into an option, at the same exercise
price, to purchase that number of shares of CVD Common Stock as equals Two
Dollars ($2.00), based upon the Average Closing Price.
2.5 Exchange of Certificates.
(a) Exchange Agent. Prior to the Effective Time, CVD shall designate a bank
or trust company reasonably acceptable to Radiance (the "Exchange Agent"). On
the Closing Date, CVD shall deposit with the Exchange Agent a combination of
cash and certificates representing the number of duly authorized whole shares of
CVD Common Stock issuable in connection with the Merger which shall comprise the
Merger Consideration as of the Closing Date, plus an amount of cash equal to the
aggregate amount payable in lieu of fractional shares in accordance with Section
2.3, to be held for the benefit of and distributed to such holders in accordance
with this Section 2.5. The Exchange Agent shall agree to hold such shares of CVD
Common Stock and funds (such shares of CVD Common Stock and funds, together with
earnings thereon, being referred to herein as the "Exchange Fund") for delivery
as contemplated by this Section 2.5 and upon such additional terms as may be
agreed upon by the Exchange Agent, Radiance and CVD before the Effective Time.
If for any reason (including losses) the amount of cash in the Exchange Fund is
inadequate to pay the cash amounts to which holders of shares of Radiance Common
Stock and Radiance Preferred Stock shall be entitled pursuant to Section 2.3,
CVD shall make available to the Surviving Corporation additional funds for the
payment thereof.
(b) Radiance Stock Exchange Procedures. As soon as reasonably practicable
after the Effective Time, CVD shall cause the Exchange Agent to mail to each
holder of record of a certificate or certificates which,
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immediately prior to the Effective Time, represented outstanding shares of
Radiance Common Stock and Radiance Preferred Stock (individually, a
"Certificate" and collectively, the "Certificates"), and whose shares are to be
exchanged pursuant to Section 2.1 into the right to receive the Merger
Consideration: (i) a letter of transmittal (which shall specify that delivery
shall be effected, and risk of loss and title to the Certificates shall pass
only upon delivery of the Certificates to the Exchange Agent and shall be in
such form and have such other provisions as CVD may reasonably specify) and (ii)
instructions for use in effecting the surrender of Certificates in exchange for
certificates representing shares of CVD Common Stock constituting the Merger
Consideration and cash (whether in lieu of fractional shares or as a component
of the Merger Consideration). Upon surrender of a Certificate for cancellation
to the Exchange Agent, together with such letter of transmittal duly executed
and completed in accordance with its terms, the holder of such Certificate shall
be entitled to receive in exchange therefor a certificate representing that
number of whole shares of CVD Common Stock constituting the Merger
Consideration, any cash component of the Merger Consideration and the cash
amount payable in lieu of fractional shares in accordance with Section 2.3, and
the Certificate so surrendered shall forthwith be canceled. In no event shall
the holder of any Certificate be entitled to receive interest on any funds to be
received in the Merger. In the event of a transfer of ownership of Radiance
Common Stock or Radiance Preferred Stock which is not registered in the transfer
records of Radiance, a certificate representing that number of whole shares of
CVD Common Stock constituting the Merger Consideration, any cash component of
the Merger Consideration and the cash amount payable in lieu of fractional
shares in accordance with Section 2.3, may be paid and issued to a transferee if
the Certificate representing such Radiance Common Stock or Radiance Preferred
Stock is presented to the Exchange Agent accompanied by all documents required
to evidence and effect such transfer and by evidence that any applicable stock
transfer taxes have been paid. Until surrendered as contemplated by this Section
2.5(b), each Certificate shall be deemed at any time after the Effective Time
for all corporate purposes of CVD, except as limited by paragraph (c) below, to
represent ownership of the number of shares of CVD Common Stock into which the
number of shares of Radiance Common Stock or Radiance Preferred Stock shown
thereon have been converted as contemplated by this Article 2.
(c) Distributions with Respect to Unexchanged Shares. No dividends or other
distributions declared or made after the Effective Time with respect to CVD
Common Stock with a record date on or after the Effective Time shall be paid to
the holder of any unsurrendered Certificate with respect to the shares of CVD
Common Stock represented thereby and no cash payment in lieu of fractional
shares shall be paid to any such holder pursuant to Section 2.3 until the holder
of record of such Certificate shall surrender such Certificate in accordance
with this Section 2.5. Subject to the effect of applicable laws, following
surrender of any such Certificate, there shall be paid to the record holder of
the certificates representing whole shares of CVD Common Stock issued in
exchange therefor, without interest, (i) at the time of such surrender, the
amount of dividends or other distributions, if any, with a record date on or
after the Effective Time which theretofore became payable, but which were not
paid by reason of the immediately preceding sentence, with respect to such whole
shares of CVD Common Stock, and (ii) at the appropriate payment date, the amount
of dividends or other distributions with a record date on or after the Effective
Time but prior to surrender and a payment date subsequent to surrender payable
with respect to such whole shares of CVD Common Stock.
(d) No Further Ownership Rights in Radiance Stock and Radiance
Options. Each holder of Radiance Common Stock and/or Radiance Preferred Stock
that have been converted into the Merger Consideration, upon surrender to the
Exchange Agent of Certificates in accordance with the terms hereof, together
with a properly completed letter of transmittal and Form of Election covering
such Radiance Preferred Stock and other customary documentation, will be
entitled to receive the Merger Consideration payable in respect of such Radiance
Common Stock and/or Radiance Preferred Stock. As of the Effective Time, all such
Radiance Common Stock and/or Radiance Preferred Stock shall no longer be
outstanding and shall automatically be canceled and retired and shall cease to
exist, and each holder of Certificates previously representing any such Radiance
Common Stock and/or Radiance Preferred Stock shall cease to have any rights with
respect thereto, except the right to receive the Merger Consideration upon
surrender of the certificates representing such Radiance Common Stock and/or
Radiance Preferred Stock, as contemplated hereby. From and after the Effective
Time, the stock transfer books of Radiance shall be closed and there shall be no
further registration of transfers on the stock transfer books of the Surviving
Corporation of the shares of Radiance Common Stock
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and Radiance Options which were outstanding immediately prior to the Effective
Time. If, after the Effective Time, Certificates are presented to the Surviving
Corporation for any reason, they shall be canceled and exchanged as provided in
this Section 2.5.
ARTICLE 3
6 REPRESENTATIONS AND WARRANTIES OF RADIANCE
Radiance represents and warrants to CVD and Sub that:
3.1 Organization and Qualification. Radiance is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware and has all requisite corporate power and authority to carry on its
business as now conducted and as proposed to be conducted. Radiance is duly
qualified or licensed to do business and is in good standing in each
jurisdiction in which the nature of its business or the ownership or leasing of
its properties makes such qualification or licensing necessary, other than in
such jurisdictions where the failure to be so qualified or licensed or to be in
good standing (individually or in the aggregate) would not have a materially
adverse effect on the business, condition (financial or otherwise), properties,
assets (including intangible assets), liabilities (including contingent
liabilities), prospects, or results of operations of Radiance (a "Material
Adverse Effect"). Subject to obtaining Radiance Stockholder's Approval, Radiance
has all requisite corporate power and authority to execute and deliver this
Agreement.
3.2 Subsidiaries. Radiance does not own, directly or indirectly, any
capital stock or other ownership interest in any corporation, partnership, joint
venture, or other entity.
3.3 Authority Relative to this Agreement. Subject to obtaining Radiance
Stockholders' Approval, Radiance has full corporate power and authority to enter
into this Agreement, to perform its obligations hereunder and to consummate the
transactions contemplated hereby. The execution, delivery and performance of
this Agreement by Radiance and the consummation by Radiance of the transactions
contemplated hereby have been duly authorized and approved by the Board of
Directors of Radiance, the Board of Directors of Radiance has agreed to
recommend adoption of this Agreement by the stockholders of Radiance and
directed that this Agreement be submitted to the stockholders of Radiance for
their consideration, and no other corporate proceedings on the part of Radiance
or its stockholders are necessary to authorize the execution, delivery and
performance of this Agreement by Radiance and the consummation by Radiance of
the transactions contemplated hereby, other than obtaining Radiance
Stockholders' Approval. Radiance Stockholders' Approval means the requisite
approvals of the shareholders of Radiance of this Agreement and the Merger
required by the DGCL and the CGCL, as applicable, and the Certificate of
Incorporation and Bylaws of Radiance. Radiance has received and has provided to
CVD the voting agreements of the Radiance stockholders listed on Schedule 3.3 to
approve the Merger. Subject to obtaining Radiance Stockholders' Approval, this
Agreement has been duly authorized and validly executed by Radiance and
constitutes a valid and legally binding obligation of Radiance, enforceable in
accordance with its terms except (i) as limited by applicable bankruptcy,
insolvency, reorganization, moratorium, and other laws of general application
affecting enforcement of creditors' rights generally, and (ii) as limited by
laws relating to the availability of specific performance, injunctive relief, or
other equitable remedies (regardless of whether such enforceability is
considered in a proceeding in equity or at law).
3.4 Capital Stock of Radiance.
(a) The authorized capital stock of Radiance consists of 30,000,000 shares
of Radiance Common Stock and 20,000,000 shares of Radiance preferred stock, of
which 2,700,000 shares are designated as Series A Convertible Preferred and
2,250,000 of which are designated as Series B Convertible Preferred Stock. As of
the date hereof, 315,000 shares of Common Stock, 2,325,930 shares of Series A
Convertible Preferred Stock and 2,250,000 shares of Series B Convertible
Preferred Stock, were issued and outstanding and no shares of Common Stock are
held by Radiance in its treasury. As of the date hereof, there are outstanding
Radiance Options to purchase approximately 550,000 shares of Radiance Common
Stock and no unvested options; and 1,000,000 shares of Radiance Common Stock are
reserved for issuance upon the exercise of Radiance Options. Except as disclosed
in Section 3.4 of the Radiance Disclosure Schedule, all outstanding shares of
capital stock
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of Radiance are duly authorized, validly issued, fully paid, and nonassessable
and not subject to preemptive rights. There are no bonds, debentures, notes, or
other indebtedness of Radiance having the right to vote (or convertible into
securities having the right to vote) on any matters on which stockholders of
Radiance may vote. Except as set forth in Section 3.4 of the Radiance Disclosure
Schedule, as of the date hereof, there are no securities, options, warrants,
calls, rights, commitments, agreements, arrangements, or undertakings of any
kind to which Radiance is a party or by which it is bound obligating Radiance to
issue, deliver or sell, or cause to be issued, delivered or sold, additional
shares of capital stock or other voting securities of Radiance or obligating
Radiance to issue, grant, extend or enter into any such security, option,
warrant, call, right, commitment, agreement, arrangement or undertaking
(together, "Options"). Except as disclosed in Section 3.4 of the Radiance
Disclosure Schedule, as of the date hereof, there are no outstanding contractual
obligations of Radiance to repurchase, redeem, or otherwise acquire any shares
of capital stock of Radiance. Radiance has furnished to CVD true and correct
copies of Radiance's Certificate of Incorporation and Bylaws as in effect as of
the date hereof. The offers and sales of all of the outstanding shares of
capital stock of Radiance were at all relevant times either registered under the
Securities Act of 1933, as amended (the "Securities Act"), and applicable state
securities laws or exempt from such requirements.
(b) Radiance acknowledges that the offering and sale of the CVD Common
Stock to be issued in exchange for all the outstanding shares of capital stock
of Radiance and upon exercise of Radiance Options have not been registered with
the Securities and Exchange Commission (the "SEC") or any state securities laws
and is intended to be exempt from registration under the Securities Act by
virtue of Section 4(2) of the Securities Act and the provisions of Regulation D
promulgated thereunder ("Regulation D"). To the actual knowledge of Radiance,
without investigation, the holders of all the outstanding shares of capital
stock of Radiance fulfill, and will fulfill as the Effective Time, the investor
suitability requirements under Section 4(2) of the Securities Act and Regulation
D. Radiance shall use its best efforts to obtain from each Radiance shareholder
a confirmation that such shareholder is an "accredited investor" as defined
under Regulation D. Notwithstanding anything herein to the contrary, Radiance
assumes no responsibility for CVD's compliance with the applicable federal and
state securities laws in connection with the Merger and issuance of CVD Common
Stock and CVD options. Radiance acknowledges that the shares of CVD Common Stock
are restricted securities and must be held indefinitely unless subsequently
registered under the Securities Act or unless an exemption from such
registration is available.
(c) Except as disclosed in Section 3.4(c) of the schedule attached hereto
(the "Radiance Disclosure Schedule"), there are no (i) outstanding Options
obligating Radiance or (ii) voting trusts, proxies or other commitments,
understandings, restrictions or arrangements in favor of any person other than
Radiance.
3.5 Non-Contravention; Approvals and Consents.
(a) Except as disclosed in Section 3.5 of Radiance Disclosure Schedule, and
except for the filing of the Agreement of Merger and other appropriate merger
documents required by the DGCL with the Secretary of State and appropriate
documents with the relevant authorities of other states in which the Constituent
Corporations are qualified to do business, the execution and delivery of this
Agreement by Radiance does not, and the performance by Radiance of its
obligations hereunder and the consummation of the transactions contemplated
hereby will not, conflict with, result in a violation or breach of, constitute
(with or without notice or lapse of time or both) a default under, result in or
give to any person any right of payment or reimbursement, termination,
cancellation, modification or acceleration of, or result in the creation or
imposition of any pledges, claims, liens, charges, encumbrances, and security
interests of any kind or nature whatsoever (collectively, "Liens") upon any of
the assets or properties of Radiance under, any of the terms, conditions or
provisions of (i) the Certificate of Incorporation or Bylaws of Radiance, or
(ii) (x) any statute, law, rule, regulation or ordinance (together, "Laws"), or
any judgment, decree, order, writ, permit or license (together, "Orders"), of
any court, tribunal, arbitrator, authority, agency, commission, official or
other instrumentality of the United States or any state, county, city or other
political subdivision (a "Governmental or Regulatory Authority"), applicable to
Radiance or any of its assets or properties, or (y) any note, bond, mortgage,
security agreement, indenture, license, franchise, permit, concession, contract,
lease or other instrument, obligation or agreement of any kind (together,
"Contracts") to which Radiance is a party or by which Radiance or any of its
assets or properties is bound, excluding from the foregoing clauses (x) and
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(y) conflicts, violations, breaches, defaults, payments, reimbursements,
terminations, cancellations, modifications, accelerations and creations and
impositions of Liens which, individually or in the aggregate, could not
reasonably be expected to have a Material Adverse Effect on Radiance or on the
ability of Radiance to consummate the transactions contemplated by this
Agreement.
(b) Other than obtaining Radiance Stockholder's Approval and except as
disclosed in Section 3.5 of Radiance Disclosure Schedule, no consent, approval
or action of, filing with or notice to any Governmental or Regulatory Authority
or other public or private third party is necessary or required under any of the
terms, conditions or provisions of any Law or Order of any Governmental or
Regulatory Authority or any contract to which Radiance is a party or by which
Radiance or any of its assets or properties is bound for the execution and
delivery of this Agreement by Radiance, the performance by Radiance of its
obligations hereunder or the consummation of the transactions contemplated
hereby, other than such consents, approvals, actions, filings and notices which
the failure to make or obtain, as the case may be, individually or in the
aggregate, could not reasonably be expected to have a Material Adverse Effect on
Radiance or on the ability of Radiance to consummate the transactions
contemplated by this Agreement.
3.6 Financial Statements. Radiance has delivered to CVD a true and
complete copy of the following financial statements: (i) the audited balance
sheets of Radiance as of December 31, 1997 and the related audited statement of
operations for the fiscal year then ended; and (ii) the unaudited balance sheet
of Radiance as of June 30, 1998 and the unaudited statement of operations for
such interim period (the "Radiance Financial Statements'). As of their
respective dates and for the respective periods then ended, the audited
financial statements and unaudited interim financial statements (including, in
each case, the notes, if any, thereto) included in Radiance Financial Statements
(A) were prepared in accordance with generally accepted accounting principles
applied on a consistent basis during the periods involved (except as may be
indicated therein or in the notes thereto) and (B) fairly present (subject, in
the case of the unaudited interim financial statements, to normal, recurring
year-end audit adjustments which are not expected to be, individually or in the
aggregate, materially adverse to Radiance and to the absence of certain footnote
disclosures) the financial position of Radiance as at the respective dates
thereof and the results of its operations and cash flows for the respective
periods then ended.
3.7 Absence of Changes. Except as disclosed in Section 3.7 of the Radiance
Disclosure Schedule and except for matters reflected or reserved against in the
balance sheet for the period ended December 31, 1997 included in Radiance
Financial Statements, since December 31, 1997 Radiance has conducted its
business only in the ordinary course, consistent with past practice and there
has been no change and no development in the business, properties, operations,
condition (financial or otherwise), or results of operations of Radiance that
had or could reasonably be expected to have a Material Adverse Effect other than
those occurring as a result of general economic or financial conditions or other
developments that are not unique to Radiance but also affect other persons who
participate or are engaged in the lines of business in which Radiance
participates or is engaged, or other than those occurring as a result of this
Agreement and the transactions contemplated hereby.
3.8 Absence of Undisclosed Liabilities. Except for liabilities that are
disclosed in this Section 3 and/or in the Radiance Disclosure Schedule and
except for matters reflected or reserved against in the balance sheet for the
period ended December 31, 1997 or in the June 30, 1998 Radiance balance sheet
for the period ended June 30, 1998 included in Radiance Financial Statements,
Radiance did not have at such date, nor has Radiance incurred since that date,
any liabilities or obligations (whether absolute, accrued, contingent, fixed or
otherwise, or whether due or to become due) of any nature that would be required
by generally accepted accounting principles to be reflected on a balance sheet
of Radiance (including the notes thereto), except liabilities or obligations (i)
which were incurred in the ordinary course of business consistent with past
practice or (ii) which have not been, and could not be reasonably expected to
have a Material Adverse Effect on Radiance.
3.9 Legal Proceedings. Except as disclosed in Section 3.9 of Radiance
Disclosure Schedule, (i) there are no actions, suits, arbitrations or
proceedings pending or, to the knowledge of Radiance, threatened against,
relating to or affecting, nor to the knowledge of Radiance are there any
Governmental or Regulatory Authority
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investigations or audits pending or threatened against, relating to or
affecting, Radiance or any of its assets and properties which could reasonably
be expected to have a Material Adverse Effect on Radiance or on the ability of
Radiance to consummate the transactions contemplated by this Agreement, and (ii)
Radiance is not subject to any Order of any Governmental or Regulatory Authority
which is having or could be reasonably expected to have a Material Adverse
Effect on Radiance, or on the ability of Radiance to consummate the transactions
contemplated by this Agreement.
3.10 Contracts and Commitments. Section 3.10 of Radiance Disclosure
Schedule contains a true and complete list of each of the following written, or
to Radiance's knowledge, oral, contracts (the "Material Contracts") to which
Radiance is a party: (i) all Contracts (excluding Radiance Employee Benefit
Plans which can be terminated at will without subjecting Radiance to cost or
penalty) providing for a commitment for employment or consultation services for
a specified or unspecified term to, or otherwise relating to employment or the
termination of employment of, any employee; (ii) all Contracts with any Person
containing any provision or covenant prohibiting or limiting the ability of
Radiance to engage in any business activity or compete with any Person in
connection with its business or prohibiting or limiting the ability of any
Person to compete with Radiance in connection with its business; (iii) all
partnership, joint venture, stockholders' or other similar Contracts with any
Person in connection with Radiance's business; (iv) all Contracts relating to
the future disposition or acquisition of assets of Radiance, other than as
contemplated by this Agreement or dispositions or acquisitions in the ordinary
course of business; (v) all other Contracts with respect to Radiance that (A)
involve the payment or potential payment, pursuant to the terms of any such
Contract, by or to Radiance of more than $25,000 annually and (B) cannot be
terminated within sixty (60) days after giving notice of termination without
resulting in any material cost or penalty to Radiance. To the knowledge of
Radiance, there is no default or event that with notice or lapse of time, or
both, would constitute a material default by Radiance under any of the Material
Contracts to which it is a party. Radiance has not received notice of a default
under any Material Contract by any party thereto. Each of the Material Contracts
is enforceable against Radiance in accordance with its terms, except as such
enforceability may be limited by general principles of equity or by bankruptcy,
insolvency or other similar laws relating to rights of creditors. Radiance has
not received notice that any party to any of the Material Contracts intends to
cancel or terminate any of the Material Contracts or to exercise or not exercise
any options under any of the Material Contracts.
3.11 Taxes. Radiance has filed all tax returns that are required to have
been filed by it in any jurisdiction for all periods ending on or prior to the
date hereof and to the knowledge of Radiance such tax returns are true, correct
and complete in all material respects, and to its knowledge Radiance has paid
all taxes shown to be due and payable on such returns and all other taxes and
assessments payable by it to the extent the same have become due and payable and
before they have become delinquent, except for any taxes and assessments the
amount, applicability or validity of which is currently being contested in good
faith by appropriate proceedings and with respect to which Radiance has set
aside on its books reserves (segregated to the extent required by generally
accepted accounting principles, consistently applied throughout the specified
period and in the immediately comparable period) deemed by it in its reasonable
discretion to be adequate. Radiance has no knowledge of any proposed material
tax assessment, obligation or other claim against Radiance. There are no
material liens for taxes upon any property or assets of Radiance, except for
liens for taxes not yet due. There are no unresolved issues of law or fact
arising out of a notice of deficiency, proposed deficiency or assessment from
the Internal Revenue Service ("IRS") or any other governmental taxing authority
with respect to taxes of Radiance which, if decided adversely would have a
Material Adverse Effect on Radiance. Radiance is not a party to any agreement
providing for the allocation or sharing of taxes with any entity other than
agreements the consequences of which are adequately reserved for in Radiance
Financial Statements. Radiance has not, with regard to any assets or property
held, acquired or to be acquired by it, filed a consent to the application of
Section 341(f) of the Code.
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3.12 Employee Benefit Plans.
(a) Except as set forth in Section 3.12 of Radiance Disclosure
Schedule, Radiance has no Employee Benefit Plan or other Plan, except for
such Employee Benefit Plans and other Plans which are provided and
maintained by CVD.
(b) As used herein:
(i) "Employee Benefit Plan" means any Plan entered into,
established, maintained, contributed to or required to be contributed to
by Radiance and existing on the date of this Agreement or at any time
subsequent thereto and on or prior to the Effective Time and, in the
case of a Plan which is subject to Part 3 of Title I of ERISA, Section
412 of the Code or Title IV of ERISA, at any time during the five-year
period preceding the date of this Agreement; and
(ii) "Plan" means any employment, bonus, incentive compensation,
deferred compensation, pension, profit sharing, retirement, stock
purchase, stock option, stock ownership, stock appreciation rights,
phantom stock, leave of absence, layoff, vacation, day or dependent
care, legal services, cafeteria, life, health, medical, accident,
disability, workers' compensation or other insurance, severance,
separation, termination, change of control or other benefit plan,
agreement, practice, policy or arrangement of any kind, whether written
or oral, including, but not limited to any "employee benefit plan"
within the meaning of Section 3(3) of ERISA.
3.13 Title to Assets. Radiance is in possession of and has good title to,
or has valid leasehold interests in or valid rights under contract to use, all
of its properties and assets primarily used in its business and material to the
condition (financial or other) of such business, free and clear of all Liens,
except (i) the lien for current taxes, payments of which are not yet delinquent,
(ii) such imperfections in title and easements and encumbrances, if any, as are
not substantial in character, amount or extent and do not materially detract
from the value of or interfere with the present use of the property subject
thereto or affected thereby, or otherwise materially impair Radiance's business
operations (in the manner presently carried on by Radiance) or (iii) as
disclosed in Radiance Financial Statements, and except for such matters which,
individually or in the aggregate, would not have a Material Adverse Effect on
Radiance. All leases under which Radiance leases any substantial amount of real
or personal property have been made available to CVD and are in good standing,
valid and effective in accordance with their respective terms, and there is not,
under any of such leases, any existing default by Radiance or to the knowledge
of Radiance any event which with notice or lapse of time or both would become a
default by Radiance other than defaults under such leases which in the aggregate
would not have a Material Adverse Effect on Radiance.
3.14 Permits, Etc. Radiance owns or validly holds all material licenses,
permits, certificates of authority, registrations, franchises and similar
consents granted or issued by any applicable Governmental or Regulatory
Authority, used or held for use which are required to conduct and material to
the condition of its business.
3.15 Compliance with Laws. To the knowledge of Radiance, Radiance is not
in violation of, nor has it violated, any applicable provisions of any Laws or
any term of any Order binding against it, except for violations which do not
have and would not have, a Material Adverse Effect on Radiance. Section 3.15 of
Radiance Disclosure Schedule sets forth a complete list of Radiance's licenses,
permits and authorizations ("Permits") other than those not material to the
business or operations of Radiance. Since December 31, 1997, no state or federal
governmental entity has revoked or materially limited any license or certificate
of authority of Radiance material to its business, and no investigation or
proceeding is pending or, to Radiance's knowledge, threatened, which involves
the revocation or material limitation of any of such licenses or certificates.
Radiance has no knowledge of any information which would lead Radiance to
believe that any licenses or permits necessary to the conduct of the business of
Radiance as presently conducted will not remain in full force and effect for the
complete duration of their terms. Radiance has made available to CVD all
material filings made to, and all inspection or compliance reports or
correspondence received from, Governmental Entities for the last three years and
will make available to CVD all other Permits as requested
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by CVD. To the knowledge of Radiance, each of such filings was in material
compliance with all applicable laws and regulations.
3.16 FDA Matters. Except as otherwise set forth in Section 3.16 of
Radiance Disclosure Schedule:
(a) To the knowledge of Radiance, Radiance is in compliance in all material
respects with all current applicable laws, statutes, rules, regulations,
standards, guides or orders administered, issued or enforced by the FDA or any
other Governmental or Regulatory Authority having regulatory authority or
jurisdiction over the products and operations of Radiance.
(b) Radiance has not received from the FDA or any other Governmental or
Regulatory Authority, and Radiance has no knowledge of any facts which would
furnish any reasonable basis for, any notice of adverse findings, FDA Form 483
inspectional observations, regulatory letters, notices of violations, warning
letters, Section 305 criminal proceeding notices under the Federal Food, Drug
and Cosmetic Act or other similar communication from the FDA or other
Governmental or Regulatory Authority, and to the knowledge of Radiance there
have been no seizures conducted or threatened by the FDA or other Governmental
or Regulatory Authority.
(c) To the knowledge of Radiance, there are no facts which are reasonably
likely to cause (i) the non-approval or non clearance, denial, withdrawal,
recall or require suspension or additional approvals or clearances of any
products intended to be sold by Radiance, or (ii) a change in the manufacturing,
marketing classification, labeling or intended use of any such products.
3.17 Labor Controversies.
(a) There are no material controversies pending or, to the knowledge of
Radiance, threatened between Radiance and any representatives of any of
Radiance's employees.
(b) To the knowledge of Radiance, there are no material organizational
efforts presently being made involving any of the presently unorganized
employees of Radiance.
(c) To the knowledge of Radiance, Radiance has complied in all material
respects with all laws relating to the employment of labor, including without
limitation, any provisions thereof relating to wages, hours, collective
bargaining, and the payment of social security and similar taxes, with respect
to its employees on the Radiance payroll.
(d) To the knowledge of Radiance, no person has asserted that Radiance is
liable in any material amount for any arrears of wages or any taxes or penalties
for failure to comply with any of the foregoing (subject to the proviso set
forth in subparagraph (a) above), except for such controversies, organizational
efforts, non-compliance and liabilities which, individually or in the aggregate,
could not be reasonably expected to have a Material Adverse Effect on Radiance.
3.18 Insurance. Section 3.18 of Radiance Disclosure Schedule lists all
policies of fire, liability, life and employee health, environmental, errors and
omissions, workers' compensation and other forms of insurance currently held and
maintained by Radiance (the "Insurance Policies"). Radiance believes that such
Insurance Policies are commercially reasonable in amount and coverage. To the
knowledge of Radiance, all of the Insurance Policies are in full force and
effect, all billed premiums with respect thereto covering all periods up to and
including the Closing Date have been paid or will have been paid on or prior to
the Closing Date and no written notice of cancellation or termination has been
received with respect to any such Policy, except for failures to pay or
cancellations or terminations which would not reasonably be expected to have a
Material Adverse Effect on Radiance.
3.19 Guaranties. Radiance has not executed any guaranty or otherwise
agreed to be a guarantor of any liability or obligation (including indebtedness)
of any other person.
3.20 Tax-Free Reorganization. Radiance has not taken and has not agreed to
take any action that would interfere with the ability of CVD to treat the Merger
as a tax-free reorganization within the meaning of Section 368(a)(1)(A) and
368(a)(2)(D) of the Code.
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3.21 Board of Directors and Stockholder Approval. The Board of Directors
has approved and adopted this Agreement and has authorized the officers of
Radiance to enter into this Agreement and to submit it to the Radiance
stockholders for their approval.
3.22 Brokers and Finders. Other than Roberts Mitani Capital, LLC, Radiance
has not employed any broker, finder, consultant or intermediary in connection
with the transactions contemplated by this Agreement who would be entitled to a
broker's, finder's or similar fee or commission in connection therewith or upon
the consummation thereof. Radiance is solely responsible for the payment of any
fee, commission or reimbursement that may be due to or become payable to Roberts
Mitani Capital, LLC, in connection with the transactions contemplated by this
Agreement.
3.23 Full Disclosure. No information furnished by or on behalf of Radiance
to CVD pursuant to this Agreement and any information contained in Radiance
Disclosure Schedule and other Schedules to this Agreement, at any time prior to
the Closing Date, contains nor will contain any untrue statement of a material
fact and does not and will not omit to state any material fact necessary to make
any statement, in light of the circumstances under which such statement is made,
not misleading.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF CVD AND SUB
CVD and Sub jointly and severally represent and warrant to Radiance as
follows:
4.1 Organization of Buyer. Each of CVD and Sub is an entity duly
organized, validly existing and in good standing under the laws of its
respective jurisdiction. CVD and Sub has full corporate power and authority to
own or lease and to operate and use its properties and assets and to carry on
its business as now conducted and as proposed to be conducted pursuant to this
Agreement. CVD is duly qualified or licensed to do business and is in good
standing in each jurisdiction in which the nature of its business or the
ownership or leasing of its properties make such qualification or licensing
necessary, other than in such jurisdictions where the failure to be so qualified
or licensed or to be in good standing (individually or in the aggregate) would
not have a materially adverse effect on the business, condition (financial or
otherwise), properties, assets, including intangible assets, liabilities
(including contingent liabilities), prospects, or results of operations of CVD
(a "Material Adverse Effect").
4.2 Authorization. Each of CVD and Sub has full corporate power and
authority to execute, deliver and perform this Agreement and the Related
Agreements and to consummate the transactions contemplated hereby and thereby.
The execution, delivery and performance of this Agreement and the Related
Agreements by CVD have been duly authorized and approved by the Board of
Directors of CVD and does not require any further authorization or consent of
CVD other than approval by its stockholders. This Agreement has been duly
authorized, validly executed and delivered by CVD and constitutes the legal,
valid and binding obligations of CVD enforceable in accordance with its terms,
except as the enforceability thereof may be subject to or limited by (i)
bankruptcy, insolvency, reorganization, arrangement, moratorium or other similar
laws now or hereafter in effect relating to or affecting creditors' rights, and
(ii) general equitable principles, regardless of whether the issue of
enforceability is considered in a proceeding in equity or at law.
4.3 Capital Stock of CVD and Sub.
(a) The authorized capital stock of CVD consists of 30,000,000 shares of
CVD Common Stock and 7,560,000 shares of preferred stock. As of October 29,
1998, 9,536,557 shares of Common Stock and no shares of preferred stock, were
issued and outstanding and 685,975 shares of CVD Common Stock are held by CVD in
its treasury. As of the Effective Time, there will be outstanding options to
purchase approximately 1,455,000 shares of CVD Common Stock (the "CVD Options");
and 291,000 shares of CVD Common Stock are reserved for issuance upon the
exercise of the CVD Options. All outstanding shares of capital stock of CVD are
duly authorized, validly issued, fully paid, and nonassessable and not subject
to preemptive rights and such capital stock has been issued in full compliance
with all applicable federal and state securities laws. There are no bonds,
debentures, notes, or other indebtedness of CVD having the right to vote (or
convertible into
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securities having the right to vote) on any matters on which stockholders of CVD
may vote. Except as set forth above, as of the date hereof, there are no
securities, options, warrants, calls, rights, commitments, agreements,
arrangements, or undertakings of any kind to which CVD is a party or by which it
is bound obligating CVD to issue, deliver or sell, or cause to be issued,
delivered or sold, additional shares of capital stock or other voting securities
of CVD or obligating CVD to issue, grant, extend or enter into any such
security, option, warrant, call, right, commitment, agreement, arrangement or
undertaking (together, "Options"). As of the date hereof, there are no
outstanding contractual obligations of CVD to repurchase, redeem, or otherwise
acquire any shares of capital stock of CVD. CVD has furnished to Radiance true
and correct copies of CVD's Certificate of Incorporation and Bylaws as in effect
as of the date hereof. The authorized capital stock of Sub consists of 100
shares of common stock, $.001 par value, of which 100 shares are issued and
outstanding and owned of record by CVD. There are no outstanding options,
warrants, or other rights to subscribe for or purchase from CVD any capital
stock of Sub, or securities convertible into Sub.
(b) Except as disclosed in Section 4.3(b) of the schedule attached hereto
(the "CVD Disclosure Schedule"), there are no (i) outstanding Options obligating
CVD or (ii) voting trusts, proxies or other commitments, understandings,
restrictions or arrangements in favor of any person other than CVD.
4.4 Non-Contravention; Approvals and Consents.
(a) Except as disclosed in Section 4.4 of CVD Disclosure Schedule, and
except for the filing of the Agreement of Merger and other appropriate merger
documents required by the DGCL with the Secretary of State and appropriate
documents with the relevant authorities of other states in which the Constituent
Corporations are qualified to do business, the execution and delivery of this
Agreement by CVD does not, and the performance by CVD of its obligations
hereunder and the consummation of the transactions contemplated hereby will not,
conflict with, result in a violation or breach of, constitute (with or without
notice or lapse of time or both) a default under, result in or give to any
person any right of payment or reimbursement, termination, cancellation,
modification or acceleration of, or result in the creation or imposition of any
pledges, claims, liens, charges, encumbrances, and security interests of any
kind or nature whatsoever (collectively, "Liens") upon any of the assets or
properties of CVD under, any of the terms, conditions or provisions of (i) the
Certificate of Incorporation or Bylaws of CVD, or (ii) (x) any statute, law,
rule, regulation or ordinance (together, "Laws"), or any judgment, decree,
order, writ, permit or license (together, "Orders"), of any court, tribunal,
arbitrator, authority, agency, commission, official or other instrumentality of
the United States or any state, county, city or other political subdivision (a
"Governmental or Regulatory Authority"), applicable to CVD or any of its assets
or properties, or (y) any note, bond, mortgage, security agreement, indenture,
license, franchise, permit, concession, contract, lease or other instrument,
obligation or agreement of any kind (together, "Contracts") to which CVD is a
party or by which CVD or any of its assets or properties is bound, excluding
from the foregoing clauses (x) and (y) conflicts, violations, breaches,
defaults, payments, reimbursements, terminations, cancellations, modifications,
accelerations and creations and impositions of Liens which, individually or in
the aggregate, could not reasonably be expected to have a material adverse
effect on the business, condition (financial or otherwise), properties, assets
(including intangible assets), liabilities (including contingent liabilities),
prospects, or results of operations of CVD (a "Material Adverse Effect") on CVD
or on the ability of CVD to consummate the transactions contemplated by this
Agreement.
(b) Except as disclosed in Section 4.4 of CVD Disclosure Schedule, no
consent, approval or action of, filing with or notice to any Governmental or
Regulatory Authority or other public or private third party is necessary or
required under any of the terms, conditions or provisions of any Law or Order of
any Governmental or Regulatory Authority or any contract to which CVD is a party
or by which CVD or any of its assets or properties is bound for the execution
and delivery of this Agreement by CVD, the performance by CVD of its obligations
hereunder or the consummation of the transactions contemplated hereby, other
than such consents, approvals, actions, filings and notices which the failure to
make or obtain, as the case may be, individually or in the aggregate, could not
reasonably be expected to have a Material Adverse Effect on CVD or on the
ability of CVD to consummate the transactions contemplated by this Agreement.
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4.5 No Litigation or Regulatory Action. There are no lawsuits, claims,
suits, proceedings or investigations pending or, to CVD's knowledge, threatened
which (i) question the legality of the transactions contemplated by this
Agreement or (ii) could reasonably be expected to have a material adverse effect
on CVD's ability to perform its obligations under this Agreement. There is no
action, suit, proceeding or investigation by CVD currently pending or which it
intends to initiate. CVD is not subject to any Order of any Governmental or
Regulatory Authority which is having or could reasonably be expected to have a
Material Adverse Effect on CVD, or on the ability of CVD or Sub to consummate
the transactions contemplated by this Agreement.
4.6 SEC Documents. CVD has delivered or made available to Radiance true
and correct copies of each registration statement, report, definitive proxy
statement or definitive information statement and all exhibits thereto filed
(including exhibits and any amendments thereto) since January 1, 1997 with the
SEC under or pursuant to the Securities Act of 1933, as amended (the "Securities
Act") or the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
(collectively, the "CVD Reports"). As of their respective dates, or as
subsequently amended prior to the Closing Date, the CVD Reports complied in all
material respects with the requirements of the Exchange Act applicable to such
CVD Reports, and none of the CVD Reports contained any untrue statement of a
material fact or omitted to state a material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. The financial
statements of CVD included in the CVD Reports comply in all material respects
with applicable accounting requirements in the published rules and regulations
of the SEC with respect thereto, have been prepared in accordance with GAAP
applied on a consistent basis (except as maybe indicated in the notes thereto)
and fairly present the consolidated financial position of CVD and its
consolidated subsidiaries as of the dates thereof and the consolidated results
of their operations and cash flows for the periods then ended (subject, in the
case of unaudited statements, to normal year-end audit adjustments, the absence
of notes and as permitted by Form 10-Q of the Exchange Act). As of their
respective dates, the CVD Reports complied as to form in all material respects
with the applicable requirements of the Securities Act and/or the Exchange Act.
4.7 Brokers and Finders. Other than Wedbush Morgan, CVD has not employed
any broker, finder, consultant or intermediary in connection with the
transactions contemplated by this Agreement who would be entitled to a broker's,
finder's or similar fee or commission in connection therewith or upon the
consummation thereof. CVD is solely responsible for the payment of any fee,
commission or reimbursement that may be due to or become payable to Wedbush
Morgan in connection with the transactions contemplated by this Agreement.
4.8 Taxes.
(a) Prior to the Merger, CVD will be in control of Sub within the meaning
of Section 368(c) of the Code. CVD will not cause or permit Sub to issue
additional shares of its stock that would result in CVD losing control of Sub
within the meaning of Section 368(c) of the Code. No stock of Sub will be issued
in the Merger.
(b) During its corporate existence, Sub has owned no assets, and prior to
the Merger shall not own any assets other than the shares of CVD to be
distributed in the Merger.
(c) As of the date hereof and as of the Effective Time, CVD has no plan or
intention to reacquire any of its stock to be distributed in the Merger.
4.9 CVD Stock Issued in Merger. The shares of CVD Common Stock to be
issued in the Merger will, when issued and delivered to the shareholders of
Radiance as a result of the Merger and pursuant to the terms of this Agreement,
be duly and validly authorized and issued, fully paid, non-assessable and free
of preemptive rights of any securityholder of CVD, and issued in compliance with
applicable federal and state securities laws.
4.10 Full Disclosure. No information furnished by or on behalf of CVD to
Radiance pursuant to this Agreement and any information contained in the CVD
Disclosure Schedule and other Schedules to this Agreement, at any time prior to
the Closing Date, contains nor will contain any untrue statement of a material
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fact and does not and will not omit to state any material fact necessary to make
any statement, in light of the circumstances under which such statement is made,
not misleading.
ARTICLE 5
COVENANTS
5.1 Covenants of Radiance. At all times from and after the date hereof
until the Effective Time, Radiance covenants and agrees as to itself that
(except as expressly contemplated or permitted by this Agreement, or to the
extent that CVD and Sub shall otherwise consent in writing):
(a) Radiance shall conduct its business only in, and Radiance shall not
take any action except in, the ordinary course consistent with past practice.
(b) Without limiting the generality of paragraph (a) of this Section,
except as otherwise disclosed in Section 5.1 of Radiance Disclosure Schedule, as
applicable, and except as contemplated or permitted by this Agreement, (i)
Radiance shall use all commercially reasonable efforts to preserve intact in all
material respects its present business organization and reputation, to keep
available the services of its key officers and employees, to maintain its
respective assets and properties in good working order and condition, ordinary
wear and tear excepted, to maintain insurance on its tangible assets and
business in such amounts and against such risks and losses as are currently in
effect, to preserve its relationships with customers and suppliers and others
having significant business dealings with it and to comply in all material
respects with all Laws and Orders of all Governmental or Regulatory Authorities
applicable to them, and (ii) Radiance shall not:
(A) amend or propose to amend its Certificate of Incorporation or
Bylaws;
(B) (w) declare, set aside or pay any dividends on or make other
distributions in respect of any of its capital stock, (x) split, combine,
reclassify or take similar action with respect to any of its capital stock
or issue or authorize or propose the issuance of any other securities in
respect of, in lieu of or in substitution for shares of its capital stock,
(y) adopt a plan of complete or partial liquidation or resolutions
providing for or authorizing such liquidation or a dissolution, merger,
consolidation, restructuring, recapitalization or other reorganization or
(z) directly or indirectly purchase, redeem or otherwise acquire any shares
of its capital stock or any Option with respect thereto, except for the
repurchase of capital stock from employees pursuant to existing agreements
providing for the repurchase of such shares of capital stock upon
termination of employment at the employee's cost therefor;
(C) except for x) the grant of stock and/or stock options which have
not been granted pursuant to the 1,000,000 shares currently authorized
under the 1997 Radiance Stock Option Plan and y) the issuance of Radiance
capital stock upon exercise or conversion of presently outstanding
warrants, options, rights or convertible securities in accordance with
their present terms, issue, deliver or sell, or authorize or propose the
issuance, delivery or sale of, any shares of its capital stock or any
Option with respect thereto, or modify or amend any right of any holder of
outstanding shares of capital stock or Options with respect thereto;
(D) acquire (by merging or consolidating with, or by purchasing a
substantial equity interest in or a substantial portion of the assets of,
or by any other manner) any business or any corporation, partnership,
association or other business organization or division thereof or otherwise
acquire or agree to acquire any assets which are material, individually or
in the aggregate, to Radiance;
(E) other than dispositions of assets which are not individually or in
the aggregate, material to Radiance, sell, lease, grant any security
interest in or otherwise dispose of or encumber any of its assets or
properties;
(F) except to the extent required by applicable law, (x) permit any
material change in (A) any pricing, marketing, purchasing, investment,
accounting, financial reporting, inventory, credit, allowance or tax
practice or policy or (B) any method of calculating any bad debt,
contingency or other reserve for
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accounting, financial reporting or tax purposes or (y) make any material
tax election or settle or compromise any material income tax liability with
any Governmental or Regulatory Authority;
(G) (x) incur any indebtedness for borrowed money or guarantee any
such indebtedness other than in the ordinary course of its business
consistent with past practice in an aggregate principal amount exceeding
$50,000 (net of any amounts of any such indebtedness discharged during such
period), or (y) voluntarily purchase, cancel, prepay or otherwise provide
for a complete or partial discharge in advance of a scheduled repayment
date with respect to, or waive any right under, any indebtedness for
borrowed money other than in the ordinary course of its business consistent
with past practice in an aggregate principal amount exceeding $50,000;
(H) enter into, adopt, amend in any material respect (except as may be
required by applicable law) or terminate any Radiance Employee Benefit Plan
or any other agreement or arrangement, plan or policy between Radiance and
one or more of its directors, officers or employees, or, except for normal
increases in the ordinary course of business consistent with past practice
that, in the aggregate, do not result in a material increase in benefits or
compensation expense to Radiance, increase in any manner the compensation
or fringe benefits of any director, officer or employee or pay any benefit
not required by any plan or arrangement in effect as of the date hereof;
(I) enter into any contract or amend or modify any existing contract,
or engage in any new transaction, outside the ordinary course of business
consistent with past practice or not on an arm's length basis, with any
affiliate of Radiance;
(J) make any capital expenditures or commitments for additions to
plant, property or equipment constituting capital assets except in the
ordinary course of business consistent with past practice in an aggregate
amount exceeding $100,000;
(K) make any change in the lines of business in which it participates
or is engaged;
(L) take any action to cause the Merger not to be treated as a
tax-free reorganization within the meaning of Section 368(a)(1)(A) and
368(a)(2)(D) of the Code; or
(M) enter into any contract, agreement, commitment or arrangement to
do or engage in any of the foregoing.
5.2 Covenants of CVD. At all times from and after the date hereof until
the Effective Time, CVD covenants and agrees as to itself and its Subsidiaries
that (except as expressly contemplated or permitted by this Agreement, or to the
extent that Radiance shall otherwise consent in writing): (i) CVD shall not make
any material changes to its business or structure which could reasonably be
expected to have a material adverse effect on the consideration to be received
by Radiance's stockholders, except that CVD shall be permitted to sell assets
relating to CVD's vascular access business; (ii) CVD shall use all reasonable
efforts to take all such actions as are necessary to effectuate the transactions
contemplated hereby and to fulfill and cause to be fulfilled the conditions to
Closing under this Agreement; (iii) CVD agrees to make all filings it is
required to make pursuant to the Exchange Act on a timely basis; and (iv) CVD
shall not, nor shall it permit Sub to take any action to cause the Merger not to
be treated as a tax-free reorganization within the meaning of Section
368(a)(1)(A) and 368(a)(2)(D) of the Code.
5.3 Advice of Changes. Except with respect to the sale by CVD of assets
relating to CVD's vascular access business, each party shall confer on a regular
and frequent basis with the other with respect to its business and operations
and other matters relevant to the Merger, and shall promptly advise the other,
orally and in writing, of any change or event, including, without limitation,
any complaint, investigation or hearing by any Governmental or Regulatory
Authority (or communication indicating the same may be contemplated) or the
institution or threat of litigation, having, or which, insofar as can be
reasonably foreseen, could have, a Material Adverse Effect on Radiance, or CVD
and its Subsidiaries taken as a whole, as the case may be, or on the ability of
Radiance or CVD and Sub, as the case may be, to consummate the transactions
contemplated hereby.
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ARTICLE 6
ADDITIONAL AGREEMENTS
6.1 Access to Information; Confidentiality.
(a) Each of Radiance and CVD shall, and shall cause each of its
Subsidiaries, if any, to, throughout the period from the date hereof to the
Effective Time, (i) provide the other party and its directors, officers,
employees, legal, investment banking and financial advisors, accountants and any
other agents and representatives (collectively, "Representatives") with full
access, upon reasonable prior notice, and during normal business hours, to
Radiance or CVD and its Subsidiaries, as the case may be, and their respective
assets, properties, books and records, but only to the extent that such access
does not unreasonably interfere with the business and operations of Radiance or
CVD and its Subsidiaries, as the case may be, and (ii) furnish promptly to such
persons (x) a copy of each report, statement, schedule and other document filed
or received by Radiance and its Subsidiaries or CVD and its Subsidiaries, as the
case may be, pursuant to the requirements of federal or state securities laws or
filed with any other Governmental or Regulatory Authority, and (y) all other
information and data (including, without limitation, copies of Contracts,
Radiance Employee Benefit Plans or CVD Employee Benefit Plans, as the case may
be, and other books and records) concerning the business and operations of
Radiance or CVD, as the case may be, as the other party or any of such other
persons reasonably may request. No investigation pursuant to this paragraph or
otherwise shall affect any representation or warranty contained in this
Agreement or any condition to the obligations of the parties hereto.
(b) Each party will hold, and will use its best efforts to cause its
Representatives to hold, in strict confidence, unless (i) compelled to disclose
by judicial or administrative process or by-other requirements of applicable
Laws or Governmental or Regulatory Authorities (including, without limitation,
in connection with obtaining the necessary approvals of this Agreement or the
transactions contemplated hereby of Governmental or Regulatory Authorities), or
(ii) disclosed in an action or proceeding brought by a party hereto in pursuit
of its rights or in the exercise of its remedies hereunder, all documents and
information concerning the other party and its Subsidiaries furnished to it by
such other party or its Representatives in connection with this Agreement or the
transactions contemplated hereby, except to the extent that such documents or
information can be shown to have been (x) previously known by Radiance or CVD,
as the case may be, or its Representatives, (y) in the public domain (either
prior to or after the furnishing of such documents or information hereunder)
through no fault of Radiance or CVD, as the case may be, and its Representatives
or (z) later acquired by Radiance or CVD, as the case may be, or its
Representatives from another source if the recipient is not aware that such
source is under an obligation to Radiance or CVD, as the case may be, to keep
such documents and information confidential. In the event that this Agreement is
terminated without the transactions contemplated hereby having been consummated,
upon the request of Radiance or CVD, as the case may be, the other party will,
and will cause its Representatives to, promptly (and in no event later than five
(5) business days after such request) redeliver or cause to be redelivered all
copies-of documents and information furnished by Radiance or CVD, as the case
may be, or its Representatives to such party and its Representatives in
connection with this Agreement or the transactions contemplated hereby and
destroy or cause to be destroyed all notes, memoranda, summaries, analyses,
compilations and other writings related thereto or based thereon prepared by
Radiance or CVD, as the case may be, or its Representatives.
6.2 Registration of CVD Common Stock. CVD shall register for re-sale the
shares of CVD Common Stock issued pursuant to the payment of the Merger
Consideration and shall file a registration statement with respect to such
registration with the SEC within five (5) business days after the Closing Date;
provided, however, Radiance shall use its best efforts to have the holders of
shares of Radiance Common Stock and/or Radiance Preferred Stock enter into (i) a
registration rights agreement with CVD in the form of Exhibit B hereto (the
"Registration Rights Agreements"); and (ii) Michael Henson and Maurice
Buchbinder, M.D. shall enter lock-up agreements (the "Lock-Up Agreements") with
CVD prior to the Effective Time which shall restrict the re-sale of CVD Common
Stock issued pursuant to the payment of the Merger Consideration for a period of
180 days after the date of this Agreement.
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6.3 Nasdaq Listing. CVD shall file an application for original listing of
the shares of CVD Common Stock on the Nasdaq National Market to be issued in the
Merger in accordance with this Agreement prior to the registration of the CVD
Common Stock as provided in Section 6.2.
6.4 Approval of Stockholders. CVD shall use its reasonable best efforts to
obtain approval of this Agreement by its stockholders (the "CVD Stockholder
Approval") as soon as reasonably practicable after the date hereof. Subject to
the exercise of fiduciary obligations under applicable law as advised by
independent counsel, CVD, through its Boards of Directors, shall recommend to
its stockholders that it is in the best interest of the stockholders that the
stockholders of CVD approve this Agreement and the transactions contemplated
hereby.
6.5 Regulatory and Other Approvals. Subject to the terms and conditions of
this Agreement and without limiting the provisions of Sections 6.3 and 6.4, each
of Radiance and CVD will proceed diligently and in good faith and will use all
commercially reasonable efforts to do, or cause to be done, all things
necessary, proper or advisable to, as promptly as practicable, (i) obtain all
consents, approvals or actions of, make all filings with and give all notices to
Governmental or Regulatory Authorities or any other public or private third
parties required of CVD, Radiance or any of their Subsidiaries to consummate the
Merger and the other matters contemplated hereby, and (ii) provide such other
information and communications to such Governmental or Regulatory Authorities or
other public or private third parties as the other party or such Governmental or
Regulatory Authorities or other public or private third parties may reasonably
request in connection therewith.
6.6 Employment Agreements. At and upon the Effective Time, CVD shall have
entered into an employment agreement with each of Michael Henson and Brent
Trauthen on substantially the terms as set forth in the forms of employment
agreements attached hereto as Exhibit C (the "Employment Agreements").
6.7 Noncompetition Agreements. At and upon the Effective Time, CVD shall
have entered into a noncompetition agreement with each of Michael Henson,
Maurice Buchbinder, M.D., and Brent Trauthen in a form mutually agreeable to
such parties (the "Noncompetition Agreements").
6.8 Medical Director. Maurice Buchbinder, M.D., shall be appointed Medical
Director of CVD on terms mutually agreed by the parties for a period of four (4)
years on a consulting basis and be entitled to receive stock options
commensurate with such position.
6.9 Management Committee. As soon as possible after the Effective Time,
CVD shall cause the Surviving Corporation to appoint a Radiation Management
Committee, to be composed of Michael Henson, Jeffrey O'Donnell and Maurice
Buchbinder, M.D., to oversee the operations of the Company with respect to the
development of radiation therapy products. The composition of such committee may
be changed by the Board of Directors of CVD. Such committee will meet at least
quarterly with the Board of Directors of CVD, and shall serve under the
direction of the Board of Directors of CVD. Mr. Henson will serve as Chairman of
the Radiation Management Committee and shall schedule committee meetings. In
addition, CVD agrees to spend at least $10,000,000 on research and the
development of radiation therapy products during the 24 months following the
Closing, with a majority of such spending directed toward completion of matters
included in the Milestones, subject to the exercise of the business judgment of
the Board of Directors. Notwithstanding the foregoing, the operations of CVD at
all times shall be under the direction and control of the Board of Directors of
CVD which shall manage such operations in accordance with its fiduciary duty to
the stockholders of CVD.
6.10 Expenses. All costs and expenses incurred in connection with this
Agreement and the transactions contemplated hereby shall be paid by the party
incurring such cost or expense. If the Merger is not consummated due to either
party's failure to obtain Stockholder Approval, the party unable to obtain such
approval shall reimburse the expenses of the other party incurred in connection
with this Agreement and the Merger, up to a maximum of Thirty Thousand Dollars
($30,000).
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6.11 Indemnification of Officers and Directors.
(a) From and after the Effective Time, CVD shall, to the fullest extent
authorized by the DGCL or any other applicable law as the same exists or may
hereafter be amended (but, in the case of any such amendment, only to the extent
that such amendment permits CVD to provide broader indemnification rights than
such law permitted CVD to provide prior to such amendment), indemnify all
directors and officers of Radiance as of the Closing against any liability or
losses (including reasonable attorney's fees for counsel who are reasonably
acceptable to CVD) any of them may incur from any action, proceeding or
investigation brought against such individuals by existing stockholders and
option holders of Radiance immediately prior to the Merger as a result of the
Merger, or any of the transactions contemplated by this Agreement. The right to
indemnification conferred in this Section shall be a contract right and shall
include the right to be paid by CVD any expenses incurred in defending any such
proceeding in advance of its final disposition; provided, however, that, if so
required by the DGCL, such advance shall be made only upon delivery to CVD of an
undertaking, by or on behalf of such director or officer, to repay all amounts
so advanced if it shall ultimately be determined that such director or officer
is not entitled to be indemnified under this Section 6.11 or otherwise. CVD
shall not be liable for any settlement effected without its written consent
(which consent shall not be unreasonably withheld). CVD shall not be obligated
pursuant to this Section 6.11 to pay the fees and disbursements of more than one
counsel for all officers and directors in any single action, except to the
extent that, in the opinion of counsel for the officers and directors, two or
more of such officers and directors have conflicting interests in the outcome of
such action, or one or more of such officers and directors and CVD have
conflicting interests in the outcome of such action. CVD may obtain directors'
and officers' liability insurance covering its obligations under this Section
6.11.
(b) The provisions of this Section 6.11 are intended to be for the benefit
of, and shall be enforceable by, each officer and director of Radiance as of the
Closing, and his or her heirs and legal representatives, and shall be in
addition to any other rights an officer and director of Radiance may have under
the Certificate of Incorporation or Bylaws of the Surviving Corporation, under
the DGCL or otherwise.
(c) In the event CVD or the Surviving Corporation, or any of their
respective successors or assigns, (i) consolidates with or merges into any other
person and shall not be the continuing or surviving corporation or entity of
such consolidation or merger or (ii) transfers all or substantially all of its
properties and assets to any person, then, and in each such case, proper
provision shall be made so that the successors and assigns of CVD or the
Surviving Corporation, as the case may be, or at CVD's option, CVD, shall assume
the obligations set forth in paragraph (a) of this Section 6.11.
(d) In the event CVD or the, Surviving Corporation, or any of their
respective successors or assigns, obtains directors' and officers' liability
insurance covering any of their directors or officers, such insurance shall also
cover the directors and officers of Radiance as of the date hereof with respect
to the obligations hereunder.
6.12 Notice and Cure. Each of CVD, Sub and Radiance will notify the other
in writing of, and contemporaneously will provide the other with true and
complete copies of any and all information or documents relating to, and will
use best efforts to cure before the Closing, any event, transaction or
circumstance, as soon as practical after it becomes known to such party,
occurring after the date of this Agreement that causes or will cause any
covenant or agreement of CVD, Sub or Radiance, as the case may be, under this
Agreement to be breached or that renders or will render untrue any
representation or warranty of CVD, Sub or Radiance, as the case may be,
contained in this Agreement as if the same were made on or as of the date of
such event, transaction or circumstance. Each of CVD, Sub and Radiance also will
notify the other in writing of, and will use best efforts to cure, before the
Closing, any violation or breach, as soon as practical after it becomes known to
such party, of any representation, warranty, covenant or agreement made by CVD,
Sub or Radiance, as the case may be, in this Agreement, whether occurring or
arising prior to, on or after the date of this Agreement. No notice given
pursuant to this Section 6.12 shall have any effect on the representations,
warranties, covenants or agreements contained in this Agreement for purposes of
determining satisfaction of any condition contained herein.
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6.13 Fulfillment of Conditions. Subject to the terms and conditions of
this Agreement, each of CVD, Sub and Radiance will take or cause to be taken all
steps necessary or desirable and proceed diligently and in good faith to satisfy
each condition to the other's obligations contained in this Agreement and to
consummate and make effective the transactions contemplated by this Agreement,
and neither CVD nor Radiance will, nor will it permit any subsidiary, if any,
to, take or fail to take any action that could be reasonably expected to result
in the nonfulfillment of any such condition.
6.14 No Solicitations. Radiance agrees that unless specifically permitted
in writing by CVD until the earlier of (i) February 1, 1999 or such later date
as determined in accordance with Section 8.1(c)(i), or (ii) receipt of written
notice from CVD of its intent not to proceed with the proposed transaction,
Radiance will not, directly or indirectly, through any officer, director,
affiliate or agent of Radiance, or otherwise, (i)solicit, initiate, entertain,
or encourage any proposals or offers from any third party relating to (a) any
possible acquisition of Radiance (whether by way of merger, purchase of capital
stock, purchase of assets or otherwise), (b) any acquisition of its assets,
technology or securities, or (c) the grant of any license, distribution or other
commercial rights in Radiance's technology or its proposed products; or (ii)
enter into, or continue, any discussions or arrangements with, otherwise
cooperate with, facilitate or encourage any effort or attempt by, any third
party with respect to any of the foregoing, or furnish to any person any
information with respect to, or any person to do or seek any of the foregoing.
Radiance shall immediately cease and cause to be terminated any such contacts or
negotiations with third parties.
ARTICLE 7
CONDITIONS
7.1 Conditions to Each Party's Obligation to Effect the Merger. The
respective obligation of each party to effect the Merger is subject to the
fulfillment, at or prior to the Closing, of each of the following conditions:
(a) No Injunctions or Restraints. No court of competent jurisdiction or
other competent Governmental or Regulatory Authority shall have enacted, issued,
promulgated, enforced or entered any Law or Order (whether temporary,
preliminary or permanent) which is then in effect and has the effect of making
illegal or otherwise restricting, preventing or prohibiting consummation of the
Merger or the other transactions contemplated by this Agreement.
(b) Governmental and Regulatory Consents and Approvals. Other than the
filing provided for by Section 1.2, all consents, approvals and actions of,
filings with and notices to any Governmental or Regulatory Authority or any
other public or private third parties or CVD or Radiance stockholders required
of CVD, Radiance or any Subsidiary which are to be taken prior to the Effective
Time to consummate the Merger and the other matters contemplated hereby, the
failure of which to be obtained or taken could be reasonably expected to have a
Material Adverse Effect on CVD and its Subsidiary taken as a whole, or the
Surviving Corporation, or on the ability of CVD and Radiance to consummate the
transactions contemplated hereby shall have been obtained.
7.2 Conditions to Obligation of CVD and Sub to Effect the Merger. The
obligation of CVD and Sub to effect the Merger is further subject to the
fulfillment, at or prior to the Closing, of each of the following additional
conditions (all or any of which may be waived in whole or in part by CVD and Sub
in their sole discretion):
(a) Representations and Warranties. Each of the representations and
warranties made by Radiance in this Agreement shall be true and correct in all
material respects as of the Closing Date as though made on and as of the Closing
Date or, in the case of representations and warranties made as of a specified
date earlier than the Closing Date, on and as of such earlier date, and Radiance
shall have delivered to CVD a certificate, dated the Closing Date and executed
on behalf of Radiance by its Chairman of the Board, Chief Executive Officer,
President or any Executive or Senior Vice President, to such effect.
(b) Performance of Obligations. Radiance shall have performed and complied
with, in all material respects, each agreement, covenant and obligation required
by this Agreement to be so performed or complied
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with by Radiance at or prior to the Closing, and Radiance shall have delivered
to CVD a certificate, dated the Closing Date and executed on behalf of Radiance
by its Chairman of the Board, President or any Executive or Senior Vice
President, to such effect.
(c) Orders and Laws. There shall not have been issued, enacted, promulgated
or deemed applicable to Radiance, the Surviving Corporation or the transactions
contemplated by this Agreement any Order or Law of any Governmental or
Regulatory Authority which is then in effect and which could be reasonably
expected to result in a material diminution of the benefits of the Merger to
CVD, and there shall not be pending or threatened on the Closing Date any
action, suit or proceeding in, before or by any Governmental or Regulatory
Authority which could be reasonably expected to result in any such issuance,
enactment, promulgation or deemed applicability of any such Order or Law or of
any Order or Law.
(d) Contractual Consents. Radiance shall have received all consents (or in
lieu thereof waivers) from parties to each Contract to the extent required
pursuant to the terms of each such contract disclosed pursuant to Sections 3.5
and 3.10.
(e) No Material Adverse Change. Since the date of this Agreement, there
shall have been no changes in the business, condition (financial or otherwise),
properties, assets (including intangible assets), liabilities (including
contingent liabilities) or results of operations of Radiance, which have had or
may be reasonably expected to have, a Material Adverse Effect on Radiance.
(f) Proceedings. All proceedings to be taken on the part of Radiance in
connection with the transactions contemplated by this Agreement and all
documents incident thereto shall be reasonably satisfactory in form and
substance to CVD, and CVD shall have received copies of all such documents and
other evidences as CVD may reasonably request in order to establish the
consummation of such transactions and the taking of all proceedings in
connection therewith.
(g) Opinion of Counsel. CVD shall have received the opinion of Rutan &
Tucker, counsel to Radiance, dated the Closing Date, in form reasonably
acceptable to CVD.
(h) Employment Agreements. The Employment Agreements shall have been
entered into by and between CVD and Michael Henson and Bret Trauthen.
(i) Noncompetition Agreements. The Noncompetition Agreements shall have
been entered into by and between CVD and Michael Henson, Maurice Buchbinder,
M.D., and Bret Trauthen.
(j) Registration Rights Agreement. CVD shall have received signed
Registration Rights Agreements in the form of Exhibit B from the holders of
shares of Radiance Common Stock, Radiance Preferred Stock and Radiance Options.
(k) Lock-Up Agreements. CVD shall have received signed Lock-Up Agreements
from Michael Henson and Maurice Buchbinder, M.D.
(l) Escrow Agreement. CVD shall have received a signed Escrow Agreement
from the Escrow Agent and Michael Henson as representative of the Radiance
Stockholders.
7.3 Conditions to Obligation of Radiance to Effect the Merger. The
obligation of Radiance to effect the Merger is further subject to the
fulfillment, at or prior to the Closing, of each of the following additional
conditions (all or any of which may be waived in whole or in part by Radiance in
its sole discretion):
(a) Representations and Warranties. Each of the representations and
warranties made by CVD and Sub in this Agreement shall be true and correct in
all material respects as of the Closing Date as though made on and as of the
Closing Date or, in the case of representations and warranties made as of a
specified date earlier than the Closing Date, on and as of such earlier date,
and CVD and Sub shall each have delivered to Radiance a certificate, dated the
Closing Date and executed on behalf of CVD by its Chairman of the Board, Chief
Executive Officer, President or any Executive or Senior Vice President and on
behalf of Sub by its President or any Vice President, to such effect.
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(b) Performance of Obligations. CVD and Sub shall have performed and
complied with, in all material respects, each agreement, covenant and obligation
required by this Agreement to be so performed or complied with by CVD, or Sub at
or prior to the Closing, and CVD and Sub shall each have delivered to Radiance a
certificate, dated the Closing Date and executed on behalf of CVD by its
Chairman of the Board, President or any Executive or Senior Vice President and
on behalf of Sub by its Chairman of the Board, President or any Vice President,
to such effect.
(c) Orders and Laws. There shall not have been issued, enacted, promulgated
or deemed applicable to the CVD, its Subsidiaries, the Surviving Corporation or
the transactions contemplated by this Agreement any Order or Law of any
Governmental or Regulatory Authority which is then in effect and which could be
reasonably expected to result in a material diminution of the benefits of the
Merger to Radiance or its stockholders, and there shall not be pending or
threatened on the Closing Date any action, suit or proceeding in, before or by
any Governmental or Regulatory Authority which could be reasonably expected to
result in any such issuance, enactment, promulgation or deemed applicability of
any such Order or Law or of any Order or Law.
(d) Registration Rights Agreement. The Registration Rights Agreements in
the form of Exhibit B shall have been entered into by CVD.
(e) No Material Adverse Change. Since the date of this Agreement, there
shall have been no changes in the business, condition (financial or otherwise),
properties, assets (including intangible assets), liabilities (including
contingent liabilities) or results of operations of CVD and its Subsidiaries
taken as a whole, which have had or may be reasonably expected to have, a
Material Adverse Effect on CVD and its Subsidiaries taken as a whole.
(f) Proceedings. All proceedings to be taken on the part of CVD and Sub in
connection with the transactions contemplated by this Agreement and all
documents incident thereto shall be reasonably satisfactory in form and
substance to Radiance, and Radiance shall have received copies of all such
documents and other evidences as Radiance may reasonably request in order to
establish the consummation of such transactions and the taking of all
proceedings in connection therewith.
(g) Opinion of Counsel. Radiance shall have received the opinion of
Stradling Yocca Carlson & Rauth, counsel to CVD and Sub, dated the Closing Date,
in form reasonably acceptable to Radiance.
(h) Employment Agreement. The Employment Agreements shall have been
executed by CVD and delivered to Michael Henson and Brett Trauthen.
(i) Escrow Agreement. The Escrow Agreement shall have been executed by CVD
are delivered to Michael Henson, as representative of the Radiance Stockholders.
ARTICLE 8
TERMINATION, AMENDMENT AND WAIVER
8.1 Termination. This Agreement may be terminated, and the transactions
contemplated hereby may be abandoned, at any time prior to the Effective Time:
(a) by mutual written agreement of the parties hereto duly authorized by
action taken by or on behalf of their respective Boards of Directors;
(b) by CVD, if the Average Closing Price is one and one-half dollars
($1.50) or less;
(c) by either Radiance or CVD upon notification to the non-terminating
party by the terminating party:
(i) at any time after February 1, 1999, if the Merger shall not have
been consummated on or prior to such date and such failure to consummate
the Merger is not caused by a breach of this Agreement by the terminating
party, provided however, that if CVD has filed with the Securities and
Exchange Commission its proxy statement with respect to seeking approval of
the Merger from its stockholders by December 15, 1998, CVD may extend such
February 1, 1999 date to the earlier of the date on which all
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conditions to Closing have been met or April 30, 1999, by delivery to
Radiance of One Million Dollars ($1,000,000) in exchange for a promissory
note from Radiance. Such promissory note shall (i) accrue simple interest
at six percent (6%) per annum, with all interest and principal payable
three (3) years after the issuance of such note, (ii) not be prepayable by
Radiance, and (iii) subject to the rights of holders of Radiance stock
existing on the date hereof, may be converted, at CVD's option into equity
securities of Radiance in Radiance's next equity financing, at the price
and on the terms of such financing.
(ii) if any Governmental or Regulatory Authority, the taking of action
by which is a condition to the obligations of either Radiance or CVD to
consummate the transactions contemplated hereby, shall have determined not
to take such action and all appeals of such determination shall have been
taken and have been unsuccessful;
(iii) if there has been a material breach of any representation,
warranty, covenant or agreement on the part of the non-terminating party
set forth in this Agreement which breach has not been cured within ten (10)
business days following receipt by the non-terminating party of notice of
such breach from the terminating party or assurance of such cure reasonably
satisfactory to the terminating party shall not have been given by or on
behalf of the non-terminating party within such ten (10) business day
period; or
(iv) if any court of competent jurisdiction or other competent
Governmental or Regulatory Authority shall have issued an Order making
illegal or otherwise restricting, preventing or prohibiting the Merger and
such Order shall have become final and nonappealable.
(v) If the requisite shareholder vote of Radiance, including approval
of holders of a majority of the Series A Preferred Stock who will receive
no consideration or benefit, other than the Merger Consideration, or CVD
approving the principal terms of this Agreement, the Agreement of Merger
and the Merger in accordance with applicable law and the Certificate of
Incorporation and Bylaws of Radiance or CVD, as applicable, is not
obtained.
8.2 Effect of Termination. If this Agreement is validly terminated by
either Radiance or CVD pursuant to Section 8.1, this Agreement will forthwith
become null and void and there will be no liability or obligation on the part of
either Radiance or CVD (or any of their respective Representatives or
affiliates), except (i) that the provisions of Sections 6.1(b) and 6.10 will
continue to apply following any such termination and (ii) that nothing contained
herein shall relieve any party hereto from liability for willful breach of its
representations, warranties, covenants or agreements contained in this
Agreement.
8.3 Amendment. This Agreement may be amended, supplemented or modified by
action taken by or on behalf of the respective Boards of Directors of the
parties hereto at any time prior to the Effective Time. No such amendment,
supplement or modification shall be effective unless set forth in a written
instrument duly executed by or on behalf of each party hereto.
8.4 Waiver. At any time prior to the Effective Time any party hereto, by
action taken by or on behalf of its Board of Directors, may to the extent
permitted by applicable law (i) extend the time for the performance of any of
the obligations or other acts of the other parties hereto, (ii) waive any
inaccuracies in the representations and warranties of the other parties hereto
contained herein or in any document delivered pursuant hereto or (iii) waive
compliance with any of the covenants, agreements or conditions of the other
parties hereto contained herein. No such extension or waiver shall be effective
unless set forth in a written instrument duly executed by or on behalf of the
party extending the time of performance or waiving any such inaccuracy or
non-compliance. No waiver by any party of any term or condition of this
Agreement, in any one or more instances, shall be deemed to be or construed as a
waiver of the same or any other term or condition of this Agreement on any
future occasion.
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ARTICLE 9
GENERAL PROVISIONS
9.1 Survival of Representations, Warranties, Covenants and Agreements. The
representations, warranties, covenants and agreements contained in this
Agreement or in any instrument delivered pursuant to this Agreement shall
survive the Effective Time and shall continue in full force and effect for a
period of one year following the Effective Time (the "Indemnification Period").
9.2 Indemnification.
(a) Indemnification of CVD. Subject to the provisions of this Article 9,
Radiance shall indemnify CVD from and against any and all damage, loss,
liability and expense (including without limitation reasonable expenses of
investigation and reasonable attorneys' fees and reasonable expenses in
connection with any action, suit or proceeding) incurred or suffered by CVD
arising out of any breach of the representations, warranties, covenants or
agreements of Radiance set forth herein (the "CVD Indemnifiable Damages").
Notwithstanding the foregoing, CVD shall not be entitled to indemnification
hereunder until the CVD Indemnifiable Damages exceed $100,000 and thereafter
shall be entitled to indemnification for all CVD Indemnifiable Damages. CVD may
obtain indemnification for any CVD Indemnifiable Damages to which this Section
9.2(a) relates only if it makes a claim for indemnification within the
Indemnification Period defined in Section 9.1, and only to the extent such claim
arose from activities of Radiance outside the control and management of CVD.
(b) Indemnification by CVD of Radiance. Subject to the provisions of this
Article IX, CVD agrees to indemnify the stockholders of Radiance after the
Effective Time from and against any and all damage, loss, liability and expense
(including without limitation reasonable expenses of investigation and
reasonable attorneys' fees and reasonable expenses in connection with any
action, suit or proceeding) incurred or suffered by the stockholders of Radiance
arising out of any breach of the representation, warranties, covenants or
agreements of CVD and Sub set forth herein (the "Radiance Indemnifiable
Damages"). Notwithstanding the foregoing, Radiance shall not be entitled to
indemnification hereunder until the Radiance Indemnifiable Damages exceed
$100,000 and thereafter shall be entitled to indemnification for all Radiance
Indemnifiable Damages, up to an amount which shall not exceed the Merger
Consideration received by the Stockholders. The Stockholders of Radiance may
obtain indemnification for any Radiance Indemnifiable Damages to which this
Section 9.2(b) relates only if a Stockholder or Stockholders of Radiance makes a
claim for indemnification within the Indemnification Period defined in Section
9.1.
(c) Indemnification Procedures. A party seeking indemnification (the
"Indemnitee") shall use its best efforts to minimize any liabilities, damages,
deficiencies, claims, judgments, assessments, costs and expenses in respect of
which indemnity may be sought under this Agreement. The Indemnitee shall give
prompt written notice to the party from whom indemnification is sought (the
"Indemnitor") of the assertion of a claim for indemnification, but in no event
longer than twenty (20) days after service of process in the event litigation is
commenced against the Indemnitee by a third party, or sixty (60) days after the
assertion of such claim, whichever shall first occur. No such notice of
assertion of a claim shall satisfy the requirements of this Section 9.2(c)
unless it describes in reasonable detail and in good faith the facts and
circumstances upon which the asserted claim for indemnification is based. If any
action or proceeding shall be brought in connection with any liability or claim
to be indemnified hereunder, the Indemnitee shall provide the Indemnitor twenty
(20) calendar days to decide whether to defend such liability or claim. During
such period, the Indemnitee shall take all necessary steps to protect the
interests of itself and the Indemnitor, including the filing of any necessary
responsive pleadings, the seeking of emergency relief or other action necessary
to maintain the status quo, subject to reimbursement from the Indemnitor of its
expenses in doing so. The Indemnitor shall (with, if necessary, reservation of
rights) defend such action or proceeding at its expense, using counsel selected
by the insurance company insuring against any such claim and undertaking to
defend such claim, or by other counsel selected by it and approved by the
Indemnitee, which approval shall not be unreasonably withheld or delayed. The
Indemnitor shall keep the Indemnitee fully apprised at all times of the status
of the defense and shall consult with the Indemnitee prior to the settlement of
any indemnified matter. The Indemnitee agrees to use reasonable efforts to
cooperate with the Indemnitor in connection with its
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defense of indemnifiable claims. In the event the Indemnitee has a claim or
claims against any third party arising out of or connected with the indemnified
matter, then upon receipt of indemnification, the Indemnitee shall fully assign
to the Indemnitor the entire claim or claims to the extent of the
indemnification actually paid by the Indemnitor and the Indemnitor shall
thereupon be subrogated with respect to such claim or claims of the Indemnitee.
(d) No Liability of Radiance Stockholders. CVD agrees that the sole and
exclusive remedy of CVD after the Effective Time for any damage, loss, liability
or expense under this Agreement, including, without limitation, for CVD
Indemnifiable Damages, pursuant to Article 9, or in connection with the
transactions contemplated hereunder shall be limited to the stock and other
property held in escrow, pursuant to the terms of the Escrow Agreement, provided
however, any such claims must be brought by CVD within the Indemnification
Period.
9.3 Knowledge. With respect to any representations or warranties contained
herein which are made to the knowledge of Radiance or CVD or any Subsidiary, as
the case may be, the actual knowledge of the officers and directors of Radiance
or CVD, as the case may be, shall be imputed to Radiance or CVD, as the case may
be.
9.4 Notices. All notices, requests and other communications hereunder must
be in writing and will be deemed to have been duly given only if delivered
personally or by facsimile transmission or nationally recognized overnight
courier service (such as Federal Express) or mailed (first class postage
prepaid) to the parties at the following addresses or facsimile numbers:
If to CVD, Sub or the Surviving Corporation, to:
CardioVascular Dynamics, Inc.
13700 Alton Parkway, Suite 160
Irvine, California 92618
Attn: Chief Executive Officer
Facsimile No.: (949) 457-9561
with a copy to:
Stradling Yocca Carlson & Rauth
660 Newport Center Drive, Suite 1600
Newport Beach, California 92660-6441
Attn: Lawrence B. Cohn, Esq.
Facsimile No.: (949) 725-4100
If to Radiance, to:
Radiance Medical Systems, Inc.
13700 Alton Parkway, Suite 157
Irvine, California 92618
Attn: Chief Executive Officer
Facsimile No.: (949) 595-7229
with a copy to:
Rutan & Tucker
611 Anton Boulevard, 14th Floor
Costa Mesa, California 92626-1998
Attn: Vicki Dallas, Esq.
Facsimile No.: (714) 546-9035
All such notices, requests and other communications will (i) if delivered
personally to the address as provided in this Section, be deemed given upon
delivery, (ii) if delivered by facsimile transmission to the facsimile number as
provided in this Section, be deemed given upon receipt, and (iii) if delivered
by nationally
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recognized overnight courier or by mail in the manner described above to the
address as provided in this Section 9.4, be deemed given upon receipt (in each
case regardless of whether such notice, request or other communication is
received by any other person to whom a copy of such notice, request or other
communication is to be delivered pursuant to this Section 9.4). Any party from
time to time may change its address, facsimile number or other information for
the purpose of notices to that party by giving notice specifying such change to
the other parties hereto.
9.5 Entire Agreement. This Agreement, together with the Registration
Rights Agreements, and the provisions of Sections 2 (last paragraph only), 4,
7-10, and 13 of that certain Letter of Intent between CVD and Radiance dated
September 23, 1998, supersedes all prior discussions and agreements among the
parties hereto with respect to the subject matter hereof and contains the sole
and entire agreement among the parties hereto with respect to the subject matter
hereof.
9.6 Public Announcements. Except as otherwise required by law or the rules
of The Nasdaq National Market, so long as this Agreement is in effect, CVD and
Radiance will not, and will not permit any of their respective Representatives
to, issue or cause the publication of any press release or make any other public
announcement or otherwise cause or permit the release in any manner which could
reasonably be expected to cause such information to be known to the public with
respect to the transactions contemplated by this Agreement without the written
consent of the other party, which consent shall not be unreasonably withheld,
provided however, that the parties may make such announcements and releases to
the extent the content of such announcements or releases was contained in a
prior approved announcement or release. CVD and Radiance will cooperate with
each other in the development and distribution of all press releases and other
public announcements with respect to this Agreement and the transactions
contemplated hereby, and will furnish the other with drafts of any such releases
and announcements as far in advance as practicable.
9.7 No Third Party Beneficiary. The terms and provisions of this Agreement
are intended solely for the benefit of each party hereto and their respective
successors or permitted assigns, and except as provided in Sections 2.1 to 2.5,
6.2, 6.3, 6.8, 6.9, 6.11, 9.2, 9.7 and 9.8 (which are intended to be for the
benefit of the persons entitled to therein, and may be enforced by any of such
persons), it is not the intention of the parties to confer third-party
beneficiary rights upon any other person.
9.8 No Assignment; Binding Effect. Prior to Closing, neither this
Agreement nor any right, interest or obligation hereunder may be assigned by any
party hereto without the prior written consent of the other parties hereto and
any attempt to do so will be void, except that Sub may assign any or all of its
rights, interests and obligations hereunder to another direct or indirect
wholly-owned Subsidiary of CVD. Subject to the preceding sentence, this
Agreement is binding upon, inures to the benefit of and is enforceable by the
parties hereto and the third party beneficiaries to the extent set forth in
Section 9.7 and their respective successors and assigns, provided however, that
CVD shall cause any such successor or assign to either (i) pay all Milestone
Payments remaining to be earned if not assumed within 10 days of such
assignment, or (ii) expressly assume in writing all CVD's obligations hereunder,
including the obligation to pay Milestone Payments when due and to fund
development as required by Section 6.9 of this Agreement.
9.9 Headings. The headings used in this Agreement have been inserted for
convenience of reference only and do not define or limit the provisions hereof
9.10 Invalid Provisions. If any provision of this Agreement is held to be
illegal, invalid or unenforceable under any present or future law, and if the
rights or obligations of any party hereto under this Agreement will not be
materially and adversely affected thereby, (i) such provision will be fully
severable, (ii) this Agreement will be construed and enforced as if such
illegal, invalid or unenforceable provision had never comprised a part hereof,
(iii) the remaining provisions of this Agreement will remain in full force and
effect and will not be affected by the illegal, invalid or unenforceable
provision or by its severance herefrom and (iv) in lieu of such illegal, invalid
or unenforceable provision, there will be added automatically as a part of this
Agreement a legal, valid and enforceable provision as similar in terms to such
illegal, invalid or unenforceable provision as may be possible.
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9.11 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of California applicable to a contract
executed and performed in such State, without giving effect to the conflicts of
laws principles thereof.
9.12 Counterparts. This Agreement may be executed in any number of
counterparts, each of which will be deemed an original, but all of which
together will constitute one and the same instrument.
9.13 Arbitration. All claims, controversies, differences or disputes
between or among any of the parties hereto arising from or relating to this
Agreement shall be determined solely and exclusively by arbitration in
accordance with the rules of commercial arbitration then in effect of the
American Arbitration Association, or any successors hereto ("AAA"), in Orange
County, California, unless the parties otherwise agree in writing. Each of the
parties consents to venue for such arbitrations in Orange County, California and
to service of process by certified or registered mail. Upon commencement of any
arbitration pursuant hereto, the parties shall jointly select an arbitrator. In
the event the parties fail to agree upon an arbitrator within twenty (20) days,
then each party shall select an arbitrator and such arbitrators shall then
select a third arbitrator to serve as the sole arbitrator; provided that if
either party, in such event, fails to select an arbitrator within seven (7)
days, such arbitrator shall be selected by the AAA upon application of either
party. Judgment upon the award of the agreed upon arbitrator or the so chosen
third arbitrator, as the case may be, shall be binding and shall be entered into
by a court of competent jurisdiction. The parties agree to abide by any decision
rendered in any such arbitration as final and binding and waive the right to
submit the dispute to a public tribunal for a jury or nonjury trial. The Civil
Discovery Act of 1986 contained in Article 3 (commencing with Section 2016) of
Chapter 3 of Title III of Part IV of the California Code of Civil Procedure
shall be applicable to such arbitration proceedings, and all rights, remedies,
obligations, liabilities and procedures set forth in said Article 3 shall be
available to the parties. Each party shall be entitled to discovery which shall
be conducted in accordance with the provisions of Section 2020 and 2025 of the
California Code of Civil Procedures. The prevailing party shall be entitled to
reasonable attorney fees in connection with such arbitration.
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IN WITNESS WHEREOF, each party hereto has caused this Agreement to be
signed by its officer thereunto duly authorized as of the date first above
written.
CARDIOVASCULAR DYNAMICS, INC.
By: /s/ JEFFREY F. O'DONNELL
--------------------------------------
Name: Jeffrey F. O'Donnell
Title: President and Chief Executive
Officer
CVD/RMS ACQUISITION CORP.
By: /s/ JEFFREY F. O'DONNELL
--------------------------------------
Name: Jeffrey F. O'Donnell
Title: President and Chief Executive
Officer
RADIANCE MEDICAL SYSTEMS, INC.
By: /s/ MICHAEL R. HENSON
--------------------------------------
Name: Michael R. Henson
Title: President and Chief Executive
Officer
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<PAGE> 144
EXHIBIT A
ESCROW AGREEMENT
<PAGE> 145
EXHIBIT A
ESCROW AGREEMENT
THIS ESCROW AGREEMENT (this "Agreement"), is made as of , 1999,
by and among CARDIOVASCULAR DYNAMICS, INC., a Delaware corporation ("CVD"), the
persons listed on the signature pages hereto (collectively, the "Holders") and
Southern California Bank (the "Escrow Agent").
WITNESSETH:
WHEREAS, CVD, CVD/RMS Acquisition Corp., a Delaware corporation, and
Radiance Medical Systems, Inc., a Delaware corporation ("Radiance"), have
entered into an Agreement and Plan of Merger dated as of November 3, 1998 (the
"Merger Agreement"), a copy of which has been delivered to the Escrow Agent and
to the Holders (all capitalized terms not otherwise defined in this Agreement
having the meanings set forth in the Merger Agreement; and
WHEREAS, Section 2.1(b)(ix) of the Merger Agreement provides that CVD may
issue the Milestone Payments in the names of the Holders and deliver them to the
Escrow Agent to be held in the escrow fund for the purpose of securing CVD's
claims for indemnification pursuant to Section 9.2 of the Merger Agreement; and
WHEREAS, the Escrow Agent is willing to act as escrow agent for CVD and the
Holders on the terms and conditions herein-after set forth:
NOW, THEREFORE, in consideration of the mutual covenants, agreements and
conditions set forth herein, the parties agree as follows:
1. Establishment of Escrow; Escrow Share Certificates. In the event of a
claim for CVD Indemnifiable Damages and in accordance with the procedures set
forth in Sections 2.1(b)(vii) and 2.1(b)(ix) of the Merger Agreement, CVD will
deposit one or more Milestone Payments or portions thereof (the "Escrow Fund"),
which may include shares of CVD Common Stock (the "Escrow Shares") in the names
of the Holders [or in the name of the Holders' Representative (as defined in
Section 7 below), as agent for the Holders,] with the Escrow Agent, and the
Holders [or the Holders' Representative, as applicable,] shall execute
assignments in blank with respect to the Escrow Shares and cause them to be
delivered to the Escrow Agent. Such deposit shall equal an amount of Escrow
Shares and Cash equal to the amount of the then pending claim for CVD
Indemnifiable Damages. For such purposes, Escrow Shares shall be valued in
accordance with the provisions of Section 2.1(b)(ix) of the Merger Agreement. In
the event that such deposit is less than the amount of the CVD Indemnifiable
Damages, or if CVD makes additional claims for CVD Indemnifiable Damages, CVD
shall be entitled to deposit additional Milestone Payments with the Escrow
Agent, subject to the provisions of Section 2.1(b)(ix) and Article 9 of the
Merger Agreement, and the Holders [or the Holders' Representative] shall execute
assignments in blank with respect to such shares and cause them to be delivered
to the Escrow Agent. The Milestone Payments shall be held by the Escrow Agent in
escrow subject to the terms and conditions set forth herein. CVD will cooperate
with the Escrow Agent, including making any written instructions required by its
stock transfer agent, to permit the Escrow Agent to make any necessary exchanges
of CVD stock certificates so as to facilitate any distribution of Escrow Shares
pursuant to this Agreement.
The Holders [or the Holders' Representative] shall deliver to CVD's stock
transfer agent at or shortly after the Closing a letter, substantially in the
form of Exhibit A hereto, instructing the transfer agent to distribute all
distributions in respect of the Escrow Shares, other than taxable dividends, to
the Escrow Agent pursuant to Section 3 of this Agreement.
2. Claims Against Escrow Fund. Pursuant to Section 9.2 of the Merger
Agreement, CVD is entitled to make claims against the Escrow Fund for CVD
Indemnifiable Damages. Unless this Agreement is terminated at an earlier date,
CVD shall be entitled to make claims against the Escrow Fund for such purpose at
any time through and including , 2000 [one year after the Effective
Time] (the "Escrow Period") (unless this Agreement is terminated at an earlier
date pursuant to Section 5 hereof), but not thereafter.
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Notwithstanding the foregoing, the Escrow Period shall be extended as it relates
to any claims for CVD Indemnifiable Damages made during the Escrow Period which
remain in dispute and have not been resolved as of such date. Any claim by CVD
against the Escrow Fund for CVD Indemnifiable Damages during the above time
period shall be presented to the Escrow Agent as follows:
(a) CVD shall notify the Escrow Agent and the Holders' Representative in
writing of any CVD Indemnifiable Damages that CVD claims are subject to
indemnification under Section 9.2 of the Merger Agreement. The notice ("Notice
of Claim") shall describe the claim and specify the amount thereof.
(b) The Holders' Representative may contest CVD's claim on behalf of the
Holders by giving the Escrow Agent and CVD written notice of such contest within
20 business days after receipt of such claim for indemnification. If CVD's
indemnification claim remains in dispute and unresolved for 30 days following
CVD's receipt of the written notice of contest, the disputed claim shall be
submitted to arbitration in accordance with Section 8 below.
(c) If the Holders, or the Holders' Representatives, as applicable, do not
contest CVD's indemnification claim pursuant to Section 2(b) above, then the
Escrow Agent shall deliver to CVD an amount from the Escrow Fund equal to the
dollar amount of the CVD Indemnifiable Damages claimed by CVD in its Notice of
Claim. For this purpose, Escrow Shares so delivered shall be valued at the
average of the closing price of CVD stock as reported on the primary national
exchange on which such stock is traded or the Nasdaq Stock Market for the twenty
trading days ending on the trading day preceding the date of delivery of such
shares to CVD (the "Escrow Share Price"). In the event that the Escrow Funds
contains both Escrow Shares and cash, the Escrow Agent shall deliver both Escrow
Shares and cash to CVD in the same ratio as then existing in the Escrow Fund.
(d) If the Holders or the Holders' Representative, as applicable, contest
CVD's indemnification claim pursuant to Section 2(b) above, the Escrow Agent
shall deliver an amount from the Escrow Fund to CVD upon receipt of either:
(i) a copy of a written settlement agreement signed by both CVD and
the Holders' Representative, or
(ii) a copy of a final and nonappealable arbitration award pursuant to
the arbitration procedure in Section 8 below.
The amount to be delivered to CVD by the Escrow Agent under this Section
2(d) shall be equal to the dollar amount of CVD Indemnifiable Damages, as set
forth in the settlement agreement or the arbitration award, as applicable,
determined using the Escrow Share Price, and shall be delivered in the manner
set forth in Section 2(c).
3. Dividends, Stock Splits, Interest and Other Distributions. Other than
taxable dividends (which shall be distributed to the Holders and shall not be
made part of the Escrow Fund), distributions declared in respect of the Escrow
Shares (including without limitation stock splits and non-taxable stock
dividends) and interest earned on any cash in the Escrow Fund during the term of
this Agreement shall be made part of the Escrow Fund. If the Escrow Shares are
reclassified or changed into other securities or property pursuant to a
reclassification of all shares of CVD Common Stock or a merger of CVD, then such
reclassified shares or other securities or property, as the case may be, shall
be made part of the Escrow Fund.
4. Voting Rights of Escrow Shares. Each Holder shall have the right to vote
his or her pro rata number of Escrow Shares in the Escrow Fund (as set forth in
Schedule A of this Agreement) on any issues that come for a vote before the
stockholders of CVD. Prior to any vote of CVD stockholders during the term of
this Agreement, CVD shall cause to be delivered to the Holders appropriate
voting and proxy materials in the same manner as provided to other stockholders
of CVD so as to permit the Holders to exercise their voting rights with respect
to the Escrow Shares.
5. Termination. This Agreement shall terminate and the Escrow Agent shall
have no further responsibilities hereunder upon the earlier to occur of (a) the
expiration of the Escrow Period set forth in Section 2 above and (b) CVD's
delivery to the Escrow Agent of written notice that CVD has elected to terminate
this
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Agreement (which election shall be at CVD's sole option and in its sole
discretion). Provided the Escrow Agent has received a Notice of Claim within the
Escrow Period, the Escrow Agent shall reserve from the Escrow Fund an amount
sufficient to pay any outstanding claims ("Reserve Claims") of CVD against the
Escrow Fund on that date. For purposes of establishing the reserve, any Escrow
Shares so reserved shall be valued at the average of the closing price of CVD
Common Stock as reported the Nasdaq National Market System (the "Nasdaq"), or if
not traded on the Nasdaq, on the primary national exchange on which such stock
is traded, for the twenty trading days ending on the trading day preceding the
establishment of such reserve. This Agreement shall continue in force as to the
amount so reserved until the resolution of such Reserve Claims upon receipt of
either (i) a copy of a written settlement agreement signed by both CVD and
Holders' Representative or, (ii) a copy of a final and nonappealable arbitration
award pursuant to the arbitration procedure set forth in Section 8 below (the
"Final Resolution"). The Escrow Agent shall distribute to the Holders all
amounts (if any) in the Escrow Fund not so reserved as of 2000,
and the Escrow Agent shall thereafter have no responsibilities with respect to
such distributed amounts. Upon the Final Resolution of each Reserve Claim, on a
claim-by-claim basis, the Escrow Agent shall distribute to CVD the amount that
CVD is entitled to receive with respect to such Reserve Claim. Escrow Shares so
delivered shall be valued at the Escrow Share Price. Upon the Final Resolution
of all Reserve Claims and the distribution to CVD of all reserved amounts to
which CVD is entitled pursuant to such claims, all remaining reserved amounts
shall be promptly distributed to the Holders. Any distribution of any portion of
the Escrow Fund held in the name of the Holders' Representative shall be made to
the Holders according to the percentages shown in Exhibit A.
6. The Escrow Agent.
(a) CVD shall pay the Escrow Agent's fee for its ordinary services under
this Agreement in accordance with the fee schedule set forth on Schedule B
attached hereto.
(b) In performing any duties under this Agreement, the Escrow Agent shall
not be liable for damages, losses, or expenses, except for gross negligence or
willful misconduct on the part of the Escrow Agent. The Escrow Agent shall not
incur any such liability for (i) any act or failure to act made or omitted in
good faith, (ii) any action taken or omitted in reliance upon any instrument,
including any written statement or affidavit provided for in this Agreement that
such agent shall in good faith believe to be genuine, or (iii) forgeries, fraud,
impersonations, or determining the scope of any representative authority. In
addition, the Escrow Agent may consult with legal counsel in connection with its
duties under this Agreement and shall be fully protected in any act taken,
suffered, or permitted by it in good faith in accordance with the advice of
counsel. The Escrow Agent is not responsible for determining and verifying the
authority of any such person acting or purporting to act on behalf of any party
to this Agreement.
(c) If any controversy arises between the parties to this Agreement, or
with any other party, concerning the subject matter of this Agreement, its terms
or conditions, the Escrow Agent will not be required to determine the
controversy or to take any action regarding it. The Escrow Agent may hold the
Escrow Fund and may wait for settlement of any such controversy by arbitration
pursuant to Section 8 hereof, by final appropriate legal proceedings or other
means as, in the Escrow Agent's discretion, may be required, despite what may be
set forth elsewhere in this Agreement. In such event, the Escrow Agent will not
be liable for interest or damage. Furthermore, the Escrow Agent may at its
option, file an action of interpleader requiring the parties to answer and
litigate any claims and rights among themselves. Upon initiating such action,
the Escrow Agent shall be fully released and discharged of and from all
obligations and liabilities imposed by the terms of this Agreement, except for
obligations or liabilities arising by reason of the prior gross negligence or
willful misconduct on the part of the Escrow Agent.
(d) The Holders, to the extent of the Escrow Fund only, and CVD shall
indemnify and hold harmless the Escrow Agent and shall share equally any and all
losses, claims, damages, liabilities and expenses (including reasonable costs of
investigation and attorneys' fees) which it may incur or which may be imposed on
it in connection with the performance of the Escrow Agent's duties under this
Agreement, including but not limited to any litigation arising from this
Agreement, but not including losses, claims, damages, liabilities or expenses
arising out of gross negligence or willful misconduct on the part of the Escrow
Agent.
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(e) The Escrow Agent may resign at any time upon giving at least 30 days'
written notice to the parties; provided, however, that no such resignation shall
become effective until the appointment of a successor escrow agent which shall
be accomplished as follows: The parties shall use their best efforts to mutually
agree on a successor escrow agent within 30 days after receiving such notice. If
the parties fail to agree upon a successor escrow agent within such time, the
Escrow Agent shall have the right to appoint a successor escrow agent authorized
to do business in the state of California. The successor escrow agent shall
execute and deliver an instrument accepting such appointment, and it shall,
without further acts, be vested with all the estates, properties, rights, powers
and duties of the predecessor Escrow Agent as if originally named as the Escrow
Agent. Upon such appointment, the predecessor Escrow Agent shall be discharged
from any further duties and liability under this Agreement, except for
obligations or liabilities arising by reason of the prior gross negligence or
willful misconduct on the part of the Escrow Agent.
(f) Any company into which the Escrow Agent may be merged or with which it
may be consolidated, or any company to whom the Escrow Agent may transfer a
substantial amount of its escrow business, shall be the successor to the Escrow
Agent without the execution or filing of any paper or any further act on the
part of any of the parties to this Agreement, anything herein to the contrary
notwithstanding.
(g) The Escrow Agent shall not sell, encumber or otherwise dispose of the
Escrow Shares held as a part of the Escrow Fund, except that the Escrow Agent
shall, upon the written direction of the Holders' Representative and CVD, effect
a sale or other disposition of the Escrow Shares in a transaction involving (a)
the receipt by the stockholders of CVD of cash in any merger or reorganization
in exchange or partly in exchange for shares of Common Stock of CVD; (b) the
sale of all or substantially all of the assets of CVD for cash and the
distribution to stockholders of CVD of the proceeds of such sale as a
liquidating distribution; or (c) a cash tender offer for all or a part of the
shares of Common Stock of CVD. In the event of any receipt of cash by the Escrow
Agent as a result of any of such transactions or as a result of a Milestone
Payment, the Escrow Agent shall invest and reinvest all cash funds from time to
time comprising the Escrow Fund, together with the earnings thereon, in money
market savings accounts or certificates of deposit at the Escrow Agent which are
insured by the Federal Deposit Insurance Corporation up to applicable limits (a
"Money Market Fund"). The Escrow Agent is authorized to liquidate in accordance
with its customary procedures any portion of the Escrow Fund consisting of
investments to provide for payments required to be made under this Agreement.
7. Holders' Representative. , or such successor as may be
agreed upon by a majority in interest of the Holders and identified to CVD by
such Holders in writing, shall act as representative of the Holders (the
"Holders' Representative"). The Holders' Representative may, but shall not be
required to, take any and all action that may be necessary or appropriate on
behalf of the Holders with respect to this Agreement, including, without
limitation, objecting to any claim by CVD against the Escrow Fund, engaging
counsel to represent the Holders in connection with any such claim, engaging any
other professionals or other consultants in connection with any such claim,
negotiating and settling any such claim, supervising and directing counsel and
any other professionals or other consultants in connection with any such claim,
and authorizing the sale of any of the Escrow Shares. The Holders'
Representative may, on behalf of the Holders, take any action that the Holders'
Representative in good faith deems to be in the best interests of the Holders
and shall, on behalf of the Holders, take any action that the Holders'
Representative may be instructed or expressly authorized to take by a majority
in interest of the Holders, including contesting or settling any claim by CVD.
To the maximum extent permitted by law, the Holders' Representative shall have
no liability of any kind or nature whatsoever with respect to any action or
omission taken by the Holders' Representative on behalf of the Holders, where
such action is taken either with the consent or the express authorization of a
majority in interest of the Holders or is otherwise taken in good faith on
behalf of the Holders.
8. Arbitration. All disputes or controversies arising under or in
connection with this Agreement shall be settled exclusively by final and binding
arbitration in accordance with Section 9.13 of the Merger Agreement.
9. Tax Reporting. Each Holder shall deliver to the Escrow Agent a completed
Form W-9 from which Escrow Agent shall prepare and file with the Internal
Revenue Service all tax reports that the Escrow Agent is required to prepare, if
any, on the Escrow Fund for the benefit of the Holders.
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10. Governing Law. This Agreement shall be governed by the laws of the
State of California without regard to principles of conflicts of laws.
11. Amendments; Modifications. This Agreement may not be amended or
modified except pursuant to a written agreement signed by each of the parties
hereto.
12. Notices. All notices and other communications hereunder shall be in
writing and shall be deemed given on the same day if delivered personally, or by
facsimile transmission with voice confirmation of receipt, or shall be deemed
given on the date receipt is confirmed if mailed by registered or certified mail
or commercial overnight courier (e.g., Federal Express, DHL, Network Courier,
Sonic, etc.), return receipt or confirmation of delivery requested, to the
parties at the following addresses (or at such other address for a party as
shall be specified by like notice):
<TABLE>
<S> <C>
If to CVD: CardioVascular Dynamics, Inc.
13700 Alton Parkway, Suite 170
Irvine, California 92618
Attn: Chief Executive Officer
Facsimile No.:
---------------------
with a copy to: Stradling, Yocca, Carlson & Rauth
660 Newport Center Drive, Suite 1600
Newport Beach, California 92660-6441
Attn: Lawrence B. Cohn
Facsimile No.: (949) 725-4100
If to the Holders' Representative: ------------------------------------
------------------------------------
------------------------------------
------------------------------------
If to the Escrow Agent: Southern California Bank
Escrow Division
4100 Newport Place, Suite 130
Newport Beach, CA 92660
Attn: Michelle Mesh
</TABLE>
13. Effect on Successors in Interest, Assignees. This Agreement shall inure
to the benefit of and be binding upon the heirs, administrators, executors,
assignees and successors of each of the parties hereto.
14. Counterparts. This Agreement may be executed in counterparts, each of
which shall be deemed an original, and all of which together shall constitute
one and the same instrument.
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IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first written above.
CARDIOVASCULAR DYNAMICS, INC.
By
--------------------------------------
Title
--------------------------------------
HOLDERS' REPRESENTATIVE on behalf of
himself and as representative of the
individual shareholders and
optionholders of Radiance Medical
Systems, Inc.
--------------------------------------
Print Name:
--------------------------------------
[Holders' Representative]
SOUTHERN CALIFORNIA BANK
By
--------------------------------------
Title
--------------------------------------
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<PAGE> 151
EXHIBIT B
REGISTRATION RIGHTS AGREEMENT
<PAGE> 152
EXHIBIT B
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (this "Agreement"), is made and entered
into as of , 1999 by and among CardioVascular Dynamics, Inc., a
Delaware corporation (the "Company"), and the former Stockholders and
optionholders of Radiance Medical Systems, Inc., a Delaware corporation, listed
on Exhibit A hereto (the "Former Radiance Holders").
RECITALS:
WHEREAS, pursuant to an Agreement and Plan of Merger, dated as of the date
hereof (the "Merger Agreement"), by and among the Company, CVD/RMS Acquisition
Corp., a Delaware corporation and wholly-owned subsidiary of the Company, and
Radiance Medical Systems, Inc., a Delaware corporation ("Radiance"), the Company
has agreed to issue and the Former Radiance Holders have agreed to accept shares
of Common Stock of the Company, par value $0.001 per share (the "CVD Common
Stock"), in consideration for their shares and/or options of Radiance.
WHEREAS, pursuant to the terms of, and in partial consideration for
Radiance's agreement to enter into the Merger Agreement, the Company has agreed
to provide the Former Radiance Holders with certain registration rights with
respect to the CVD Common Stock;
AGREEMENT:
NOW, THEREFORE, in consideration of the foregoing and the mutual promises,
representations, warranties and covenants of the parties hereto and subject to
the terms and conditions set forth herein, the Company and the Former Radiance
Holders agree as follows:
1. Certain Definitions. As used in this Agreement, the following terms
shall have the following respective meanings. Other capitalized terms used but
not defined herein shall have the meanings ascribed to such terms in the Merger
Agreement.
"Commission" or "SEC" shall mean the Securities and Exchange Commission or
any other federal agency at the time administering the Securities Act.
"Holder" shall include the Former Radiance Holders and any transferee of
Registrable Securities which have not been sold to the public to whom the
registration rights conferred by this Agreement have been transferred in
compliance with Section 9 of this Agreement.
"Holders' Representative" shall have the meaning set forth in Section
2.1(b)(ix) of the Merger Agreement.
The terms "register," "registered" and "registration" shall refer to a
registration effected by preparing and filing a registration statement in
compliance with the Securities Act and applicable rules and regulations
thereunder, and the declaration or ordering of the effectiveness of such
registration statement.
"Registrable Securities" shall mean: (i) all shares of CVD Common Stock
which may be issued to the Former Radiance Holders pursuant to the Merger
Agreement, including, without limitation, shares of CVD Common Stock which may
be issued as Milestone Payments pursuant to Section 2.1(b)(v) of the Merger
Agreement; (ii) any securities into which or for which any such shares
referenced in (i) above shall have been converted or exchanged pursuant to any
recapitalization, reorganization or merger; and (iii) any securities issued with
respect to any of the foregoing pursuant to a stock split or stock dividend, but
shall not include any shares of CVD Common Stock issued on exercise of options
granted to Former Radiance Option Holders on exercise of CVD options covered by
a Form S-8 Registration Statement.
"Registration Expenses" shall mean all expenses to be incurred by the
Company in connection with the Holders' exercise of their registration rights
under this Agreement, including, without limitation, all registration and filing
fees, printing expenses, fees and disbursements of counsel for the Company, blue
sky
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fees and expenses, and the expense of any special audits incident to or required
by any such registration (but excluding the compensation of regular employees of
the Company, which shall be paid in any event by the Company).
"Registration Statement" shall have the meaning set forth in Section 2(a)
herein.
"Regulation D" shall mean Regulation D promulgated under the Securities
Act, as amended from time to time.
"Securities Act" shall mean the Securities Act of 1933, as amended from
time to time.
"Selling Expenses" shall mean all underwriting discounts and selling
commissions and transfer taxes, if any, applicable to the sale of Registrable
Securities and all fees and disbursements of counsel for Holder not described
within "Registration Expenses."
2. Registration Requirements. The Company shall file with the Commission,
not later than five (5) business days after the Closing Date, a registration
statement covering the resale of the Registrable Securities, and shall take all
action necessary to qualify the Registrable Securities under state "blue sky"
laws as hereinafter provided. The Company shall use its diligent best efforts to
effect the foregoing registration (including, without limitation, the execution
of an undertaking to file amendments and post-effective amendments, appropriate
qualification under and compliance with applicable blue sky or other state
securities laws and appropriate compliance with applicable regulations issued
under the Securities Act) all in accordance with this Agreement. Such best
efforts by the Company shall include, without limitation, the following:
(a) The Company shall file (i) registration statements with the Commission
pursuant to Rule 415 under the Securities Act on Form S-3 under the Securities
Act and the Company shall use its best efforts to qualify for the use of such
Form (or in the event that the Company is ineligible to use such form, such
other form as the Company is eligible to use under the Securities Act) covering
all of the Registrable Securities so to be registered (each, a "Registration
Statement"); (ii) such blue sky filings as shall be reasonably requested to
permit such sales, provided, however, that the Company shall not be required to
register the Registrable Securities in any jurisdiction that would subject it to
general service of process in any such jurisdiction where it is not then so
subject or subject the Company to any tax in any such jurisdiction where it is
not then so subject or require the Company to qualify to do business in any
jurisdiction where it is not then so qualified; and (iii) required filings with
the National Association of Securities Dealers, Inc. ("NASD") and any exchange
where the Shares are traded. The Company shall use its diligent best efforts to
have the Registration Statement and other filings declared effective as soon as
practicable after the filing of such Registration Statement.
(b) The Company shall make available for inspection and review by the
Holders, the Holders' Representative, any underwriter participating in any
disposition pursuant to a Registration Statement, and any attorney or accountant
retained by any Holder, the Holders' Representative or underwriter, any such
registration statement or amendment or supplement or any blue sky, NASD or other
filing, all financial and other records, pertinent corporate documents and
properties of the Company as they may reasonably request for the purpose, and
cause the Company's officers, directors and employees to supply all information
reasonably requested by any such representative, underwriter, attorney or
accountant in connection with such Registration Statement; provided, however,
that the relevant Holder shall first agree in writing with the Company that any
information that is reasonably and in good faith designated by the Company in
writing as confidential at the time of delivery of such information shall be
kept confidential by the Holder and that the Holder will use his or her best
efforts to cause its representatives, the Holders' Representative, and such
other persons so to keep such information confidential, unless (i) disclosure of
such information is required by court or administrative order or is necessary to
respond to inquiries of regulatory authorities, (ii) disclosure of such
information is required by law (including any disclosure requirements pursuant
to Federal securities laws in connection with the filing of any Registration
Statement or the use of any prospectus referred to in this Agreement), (iii)
such information becomes generally available to the public other than as a
result of a disclosure or failure to safeguard by any such person, (iv) such
information becomes available to any such
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<PAGE> 154
person from a source other than the Company and such source, to the knowledge of
such persons, is not bound by a confidentiality agreement with the Company, or
(v) such information was known to or is developed by such persons without
reference to such confidential information of the Company.
(c) The Company will keep the Holders and the Holders' Representative
advised in writing as to initiation of each registration and as to the
completion thereof.
(d) The Company shall keep such registration effective for the period
ending on the earliest to occur of (i) on the third anniversary of the Closing
Date, (ii) when the Holders have completed the distribution of the Registrable
Securities described in the registration statement relating thereto, or (iii)
the date on which the Registrable Securities are salable pursuant to Rule 144
promulgated under the Securities Act, without regard to any limitation on
volume.
(e) The Company shall promptly notify the Holders' Representative in
writing by telecopier of any stop order, injunction or other order or
requirement of the SEC or any other governmental agency is issued which suspends
the effectiveness of any such registration.
(f) The Company shall promptly furnish such number of prospectuses and
other documents incident thereto as the Holders' Representative from time to
time may reasonably request.
(g) The Company shall promptly notify the Holders' Representative in
writing by telecopier if any registration statement with respect to any
Registrable Securities is no longer current or includes an untrue statement of
material fact required to be stated therein or necessary to make the statements
therein not misleading in light of the circumstances then existing, in which
case the Holders shall suspend use of such registration statement until notified
by the Company. In such event, the Company shall use its best efforts to correct
any such matter so that such registration statement may again be used.
(h) The Company shall furnish, at the request of any Holder, on the date
that the registration statement with respect to such securities becomes
effective, (i) an opinion, dated such date, of the counsel representing the
Company for the purposes of such registration, in form and substance as is
customarily given to underwriters in an underwritten public offering, addressed
to the Holders (provided however that no opinion shall be required with respect
to the accuracy of the factual disclosures in such registration statement), and
(ii) to the extent permitted by the rules of the AICPA, a letter dated such
date, from the independent certified public accountants of the Company, in form
and substance as is customarily given by independent certified public
accountants to underwriters in an underwritten public offering, addressed to the
Holders.
3. Expenses of Registration. All Registration Expenses incurred in
connection with any registration, qualification or compliance pursuant to this
Agreement shall be borne by the Company, and all Selling Expenses shall be borne
by the Holder.
4. Indemnification.
(a) Company Indemnity. The Company will indemnify the Holders, any
officers, directors and partners of any Holder, and each person controlling any
Holder within the meaning of Section 15 of the Securities Act and the rules and
regulations thereunder, and each underwriter, if any, and each person who
controls, within the meaning of Section 15 of the Securities Act and the rules
and regulations thereunder, any underwriter, against all claims, losses, damages
and liabilities (or actions in respect thereof) arising out of or based on any
untrue statement (or alleged untrue statement) of a material fact contained in
any prospectus, offering circular or other document (including any related
registration statement, notification or the like) incident to any registration
effected pursuant to this Agreement, or based on any omission (or alleged
omission) to state therein a material fact required to be stated therein or
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading, or any violation by the Company of
the Securities Act or any state securities law or in either case, any rule or
regulation thereunder applicable to the Company and relating to action or
inaction required of the Company in connection with any such registration, and
will reimburse the Holders, any officers, directors and partners of any Holder,
and each person controlling any Holder, each such underwriter and each person
who controls any such underwriter, for any legal and any other expenses
reasonably incurred in connection with investigating and defending any such
claim, loss,
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<PAGE> 155
damage, liability or action; provided that the Company will not be liable in any
such case to the extent that any such claim, loss, damage, liability or expense
arises out of or is based on any untrue statement or omission (or alleged untrue
statement or omission) based upon written information furnished to the Company
by the Holders' Representative or any Holder and stated to be specifically for
use therein. The indemnity agreement contained in this Section 4(a) shall not
apply to amounts paid in settlement of any such loss, claim, damage, liability
or action if such settlement is effected without the consent of the Company
(which consent will not be withheld unreasonably).
(b) Holder Indemnity. Each Holder severally but not jointly with other
Holders will, if Registrable Securities held by it are included in a
registration statement effected pursuant to this Agreement, indemnify the
Company, each of its directors, officers, partners, each person who controls the
Company within the meaning of Section 15 of the Securities Act and the rules and
regulations thereunder, each other Holder, and each of their officers, directors
and partners, and each person controlling such other Holder, against all claims,
losses, damages and liabilities (or actions in respect thereof) arising out of
or based on any untrue statement (or alleged untrue statement) of a material
fact contained in any registration statement, prospectus, offering circular or
other document incident to any registration of Registrable Securities pursuant
to this Agreement, or any omission (or alleged omission) to state therein a
material fact required to be stated therein or necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading, and will reimburse the Company and such other Holders and their
directors, officers and partners or control persons for any legal or any other
expenses reasonably incurred in connection with investigating or defending any
such claim, loss, damage, liability or action, in each case to the extent, but
only to the extent, that such untrue statement (or alleged untrue statement) or
omission (or alleged omission) is made in such registration statement,
prospectus, offering circular or other document in reliance upon and in
conformity with written information furnished to the Company by the Holder and
stated to be specifically for use therein; provided, however, that the
obligations of the Holder shall not apply to amounts paid in settlement of any
such claims, losses, damages or liabilities if such settlement is effected
without the consent of the Holder (which consent shall not be withheld
unreasonably). Notwithstanding anything to the contrary in this Section 4, any
Holder's liability under this Section 4(b) with respect to any particular
registration shall be limited to an amount equal to the proceeds received by
such Holder from the Registrable Securities sold in such registration.
(c) Procedure. Each party entitled to indemnification under this Section 4
(the "Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified Party
has actual knowledge of any claim as to which indemnity may be sought, and shall
permit the Indemnifying Party to assume the defense of any such claim in any
litigation resulting therefrom, provided that counsel for the Indemnifying
Party, who shall conduct the defense of such claim or any litigation resulting
therefrom, shall be approved by the Indemnified Party (whose approval shall not
be unreasonably withheld), and the Indemnified Party may participate in such
defense at its own expense, and provided, further, that the failure of any
Indemnified Party to give notice as provided herein shall not relieve the
Indemnifying Party of its obligations under this Section except to the extent
that the Indemnifying Party is actually prejudiced by such failure to provide
notice. No Indemnifying Party, in the defense of any such claim or litigation,
shall, except with the consent of the Indemnified Party, consent to entry of any
judgment or enter into any settlement which does not include as an unconditional
term thereof the giving by the claimant or plaintiff to all Indemnified Parties
of a release from all liability in respect of such claim or litigation. Each
Indemnified Party shall furnish such information regarding itself or the claim
in question as any Indemnifying Party may reasonably request in writing.
5. Contribution. If the indemnification provided for in Section 4 herein is
unavailable to the Indemnified Parties in respect of any losses, claims, damages
or liabilities referred to herein, then each Indemnifying Party, in lieu of
indemnifying the Indemnified Parties, shall contribute to the amount paid or
payable by such Indemnified Parties as a result of such losses, claims, damages
or liabilities as between the Company on the one hand and the Indemnified
Parties on the other, in such proportion as is appropriate to reflect, the
relative fault of the Company on the one hand, and of the Indemnified Parties on
the other hand, in connection with the statements or omissions which resulted in
such losses, claims, damages or liabilities, as well as any other relevant
equitable considerations.
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<PAGE> 156
The relative fault of the Company on the one hand, and of the Holder on the
other hand, shall be determined by reference to, among other things, whether the
untrue or alleged untrue statement of a material fact or omission to state a
material fact relates to information supplied by the Company or by the Holder or
its representative, and the parties' relative intent, knowledge, access to
information, and opportunity to correct or prevent such statement or omission.
In no event shall the obligation of any Indemnifying Party to contribute
under this Section 4 exceed the amount that such Indemnifying Party would have
been obligated to pay by way of indemnification if the indemnification provided
for under Section 4(a) or 4(b) hereof had been available under the
circumstances.
The Company and the Holder agree that it would not be just and equitable if
contribution pursuant to this Section 4 were determined by pro rata allocation
(even if the Indemnified Parties were treated as one entity for such purpose) or
by any other method of allocation which does not take account of the equitable
considerations referred to in the immediately preceding paragraphs. The amount
paid or payable by an Indemnified Party as a result of the losses, claims,
damages and liabilities referred to in the immediately preceding paragraphs
shall be deemed to include, subject to the limitations set forth above, any
legal or other expenses reasonably incurred by such Indemnified Party in
connection with investigating or defending any such action or claim. 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.
6. Survival. The indemnity and contribution agreements contained in
Sections 4 and 5 shall remain operative and in full force and effect regardless
of (i) any investigation made by or on behalf of any Indemnified Party or by or
on behalf of the Company or (ii) the consummation of the sale or successive
resales of the Registrable Securities.
7. Information By Holder and Any Underwriters. The Holders' Representative
shall furnish to the Company, within five (5) business days of the Company's
request therefor, such information regarding the Holders or underwriters, as the
case may be, and the distribution proposed by such Holders or underwriters as
the Company may reasonably request in writing and as shall be reasonably
required in connection with any registration, qualification or compliance
referred to in this Agreement.
8. Transfer or Assignment of Registration Rights. The rights granted to the
Former Radiance Holders by the Company under this Agreement, to cause the
Company to register Registrable Securities, may be transferred or assigned, as
the case may be, to a transferee or assignee of any Registrable Securities;
provided that (i) the Company is given written notice by the assigning Former
Radiance Shareholder or the transferee or assignee of Holder at the time of or
within a reasonable time after such transfer or assignment, stating the name and
address and telecopier number of such transferee or assignee and identifying the
securities with respect to which such registration rights are being transferred
or assigned; (ii) the transferee or assignee of such rights is not deemed by the
Board of Directors of the Company in its reasonable judgment, to be a competitor
of the Company; and (iii) the transferee or assignee of such rights agrees to be
bound by this Agreement.
9. Rule 144 Requirements. The Company shall make publicly available and
available to the Holders, pursuant to Rule 144 of the Commission under the
Securities Act, such information as shall be necessary to enable the Holders to
make sales of restricted securities, as defined in such rule, pursuant to that
rule. So long as a Holder owns any Registrable Securities, the Company will
furnish to any Holder, upon request made by such Holder at any time after the
undertaking of the Company in the preceding sentence shall have first become
effective, a written statement signed by the Company, describing briefly the
action the Company has taken or proposes to take to comply with the current
public information requirements of Rule 144. The Company will, at the request of
any Holder of Registrable Securities, upon receipt from such Holder of a
certificate certifying (i) that such Holder has held such Registrable Securities
for a period of not less than two (2) consecutive years, (ii) that such Holder
has not been an affiliate (as defined in Rule 144) of the Company at any time
during the preceding ninety (90) days, and (iii) as to such other matters as may
be appropriate in accordance with Rule 144, remove from the stock certificates
representing such Registrable
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<PAGE> 157
Securities that portion of any restrictive legend which relates to the
registration provisions of the Securities Act.
10. Miscellaneous.
(a) Entire Agreement; Counterparts. This Agreement contains the entire
understanding and agreement of the parties with respect to the subject matter
hereof, and may not be modified or terminated except by a written agreement
signed by the Company and the Holders of at least a majority of the Registrable
Securities. This Agreement may be executed in any number of counterparts, each
of which when so executed shall be deemed to be an original and all of which
taken together shall constitute one and the same instrument.
(b) Notices. All notices, requests, consents, and other communications
hereunder shall be in writing and shall be deemed to have been properly given or
made on the date personally delivered or on the date mailed, by first class
registered or certified mail with postage prepaid, by private nationally
recognized courier service or by facsimile and confirmed, if delivered, mailed,
courier or facsimile to the Holders at the address or telecopier number, if any,
indicated on the records of the Company or to the Company at the following
addresses:
CardioVascular Dynamics, Inc.
13700 Alton Parkway, Suite 170
Irvine, CA 92618
Attention: Chief Executive Officer
FAX: (949) 457-9561
With a copy to:
Stradling Yocca Carlson & Rauth
660 Newport Center Drive, Suite 1600
Newport Beach, California 92660
Attention: Lawrence B. Cohn
FAX: (949) 725-4100
Any party hereto may designate a different address by providing written notice
of such new address to the other parties hereto.
(c) Governing Law; Consent of Jurisdiction. This Agreement shall be
governed by and construed in accordance with the laws of the State of
California, without giving effect to principles of conflicts of laws thereof.
Each of the Company and the Holders (i) hereby irrevocably submits to the
exclusive jurisdiction of State or federal courts of the Orange County,
California for the purposes of any suit, action or proceeding arising out of or
relating to this Agreement and (ii) hereby waives, and agrees not to assert in
any such suit, action or proceeding, any claim that it is not personally subject
to the jurisdiction of such court, that the suit, action or proceeding is
brought in an inconvenient forum or that the venue of the suit, action or
proceeding is improper.
(d) Headings. The headings used in this Agreement are used for convenience
only and are not to be considered in construing or interpreting this Agreement.
(e) Severability. In the event that any one or more of the provisions
contained herein, or the application thereof in any circumstance, is held
invalid, illegal or unenforceable, the validity, legality and enforceability of
any such provision in every other respect and of the remaining provisions
contained herein shall not be affected or impaired thereby.
(f) Remedies. In the event of a breach by the Company of its obligations
under this Agreement, each Holder, in addition to being entitled to exercise all
rights granted by law, including recovery of damages, will be entitled to
specific performance of its rights under this Agreement. The Company agrees that
monetary damages would not be adequate compensation for any loss incurred by
reason of a breach by it of any of the provisions of this Agreement and hereby
agrees to waive the defense in any action for specific performance that a remedy
at law would be adequate.
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(g) Registrable Securities Held by the Company. Whenever the consent or
approval of Holders of Registrable Securities is required pursuant to this
Agreement, Registrable Securities held by the Company shall not be counted in
determining whether such consent or approval was duly and properly given by such
Holders.
(h) Term. The agreements of the Company contained in this Agreement shall
continue in full force and effect so long as any Holder holds any Registrable
Securities.
(i) No Inconsistent Agreements. The Company has not previously entered into
any agreement with respect to its Common Stock granting any registration rights
to any Person inconsistent with this Agreement, and will not on or after the
date of this Agreement enter into any agreement with respect to its securities
which grants demand registration rights inconsistent with this Agreement to
anyone or which is inconsistent with the rights granted to the Holders of
Registrable Securities in this Agreement or otherwise conflicts with the
provisions hereof.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the date first above written.
COMPANY:
CARDIOVASCULAR DYNAMICS, INC.
By:
Its:
FORMER RADIANCE HOLDERS
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I-B-7
<PAGE> 159
ANNEX II
FAIRNESS OPINION
<PAGE> 160
[WEDBUSH LETTERHEAD]
ANNEX II
FAIRNESS OPINION
November 3, 1998
Independent Committee of the Board of Directors
CardioVascular Dynamics, Inc.
13700 Alton Parkway
Suite 160
Irvine, California 92618
Gentlemen:
We understand that CardioVascular Dynamics, Inc. (the "Company"), Radiance
Medical Systems, Inc. ("Radiance") and CVD/RMS Acquisition Corp., a wholly-owned
subsidiary of the Company (the "Subsidiary"), have entered into an Agreement and
Plan of Merger dated November 3, 1998 (the "Agreement"), pursuant to which
Radiance will be merged with and into the Subsidiary (the "Merger").
You have requested our opinion as to the fairness, from a financial point
of view, to the stockholders of the Company of the consideration (the "Merger
Consideration") to be paid by the Company in the Merger. We note that the
Company beneficially owns approximately 45% of the common stock of Radiance on a
fully-diluted basis.
Wedbush Morgan Securities is an investment banking firm and member firm of
the New York Stock Exchange and other principal stock exchanges in the United
States, and is regularly engaged as part of its business in the valuation of
businesses and their securities in connection with mergers and acquisitions,
negotiated underwritings, private placements, secondary distributions of listed
and unlisted securities, and valuations for corporate, estate and other
purposes.
Pursuant to the Merger, as set forth in the Agreement and as more fully
described to us by management of the Company, each outstanding share of Radiance
common stock and of Radiance series A preferred stock (other than shares owned
by the Company or the Subsidiary) will be converted into the right to receive
(i) a number of shares of the Company's common stock having a value equal to
$2.00 and $3.00, respectively, of the Company's common stock, (ii) additional
shares of the Company's common stock to the extent its value at the
effectiveness of registration of such stock which occurs more than 30 days after
the closing is less than its value at the time of closing, and (iii) depending
on the achievement of certain product development milestones over the next three
years, a maximum number of shares of the Company's common stock having a value
equal to $3.00 and $2.00, respectively, of the Company's common stock (with
increases of up to 130% of each milestone payment for early achievement and
decreases or no payment for late achievement). The value of the Company's common
stock is to be determined on the basis of closing prices on the Nasdaq National
Market averaged over a specified period prior to signing, closing or achievement
of milestones or on specified dates, as the case may be, and is subject to
adjustment to the extent the average price prior to closing is greater than
$5.00 or less than $2.00. The vesting of outstanding options to purchase
Radiance common stock will be accelerated and, to the extent not exercised, each
such option will be converted into an option to purchase that number of shares
of common stock of the Company as equals $2.00, together with participation in
the milestone payments. In the event the price of the Company's common stock
prior to closing or prior to a milestone payment is less than $5.00 per share,
the Company may pay up to 30% of the amount due the
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<PAGE> 161
Radiance stockholders and optionholders in cash, based to the extent feasible on
individual elections. In addition, any amount due the Radiance stockholders
based on the value of the Company's common stock at the effectiveness of
registration as compared with the value at the closing may be paid in cash. Cash
payments may be made only to holders of Radiance series A preferred stock, and
holders of Radiance common stock will receive only shares of the Company's
common stock. The holders of Radiance common stock and series A preferred stock
also will be entitled to appraisal rights under the Delaware General Corporation
Law and the California General Corporation Law. In no event, however, can the
total amount of cash paid, including cash paid on exercise of appraisal rights
and for fractional shares, exceed 30% of the Merger Consideration, valued as
provided in the Agreement. The terms and conditions of the Merger are set forth
in more detail in the Agreement.
For purposes of this opinion and in connection with our review of the
Merger, we have reviewed and analyzed, among other things: (1) the Agreement and
the specific terms of the Merger; (2) certain publicly available business and
financial information relating to the Company and in general to the medical
device and medical technology industry; (3) certain internal information
furnished to us by the managements of the Company and Radiance concerning the
past and current business operations, financial condition and future prospects
of their respective companies and, in the case of Radiance, projected future
operating results; (4) certain publicly available and other information
concerning the reported price and trading history of the common stock of the
Company; (5) certain publicly available information with respect to other
medical device and medical technology companies deemed comparable to the Company
or Radiance; and (6) certain publicly available financial terms of selected
merger and acquisition transactions deemed comparable. In addition, we have held
discussions with the managements of the Company and Radiance concerning their
views as to the financial and other information described above, and with the
management of the Company concerning the strategic rationale for, and the
benefits expected to result from, the Merger. We have also had the management of
the Company describe to us the terms of certain ancillary agreements to be
executed and delivered, including employment agreements, noncompetition
agreements, registration rights agreements, lock-up agreements and an escrow
agreement. In addition to the foregoing, we have conducted such other analyses
and examinations and considered such other financial, economic and market
criteria as we deem appropriate to arrive at our opinion.
In rendering our opinion, we have assumed and relied upon, without
independent verification, the accuracy and completeness of the information
provided to or reviewed by us for the purposes of our opinion. With respect to
the information provided to us by the Company and the internal financial
projections and other information provided to us by Radiance, we have assumed
that such information was reasonably prepared on bases reflecting managements'
best currently available estimates and judgments as to the expected future
financial performance of the Radiance business. We have assumed that, after the
Merger, the Radiance business will perform substantially in accordance with such
projections. We further relied on the assurances of managements of the Company
and of Radiance that they are unaware of any facts that would make the
information or projections provided to us incomplete or misleading. We have not
made or been provided with any independent evaluation or appraisal of any of the
Company's or Radiance's assets, liabilities, technology or intellectual
property. We have further assumed that all conditions to the Agreement will be
satisfied and not waived.
Our opinion is based upon economic, market and other conditions and
circumstances as they exist and can be evaluated as of the date hereof. Events
occurring after the date hereof could materially affect the assumptions used in
preparing this opinion.
Our opinion does not address the underlying merits of the business decision
of the Company to enter into the Agreement or to complete the Merger.
Furthermore, we have not been consulted in determining the amount or the
composition of the consideration offered in the Merger. We are not expressing
any opinion as to what the value of the Company's shares actually will be, if
and when issued pursuant to the Agreement, or the price at which such shares
will trade following consummation of the Merger.
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<PAGE> 162
In the ordinary course of our business, we and our affiliates may actively
trade the common stock of the Company for our own account and for the accounts
of our customers and, accordingly, we may at any time hold a long or short
position in the common stock of the Company.
This opinion is for the benefit and use of the members of the Independent
Committee of the Board of Directors of the Company in connection with their
evaluation of the Merger and does not constitute a recommendation to any holder
of Company common stock as to how such stockholder should vote with respect to
the Merger. This opinion may not be used for any other purpose without our prior
written consent, except as provided for in the engagement letter dated as of
September 10, 1998, between the Company and Wedbush Morgan Securities.
Based upon and subject to the foregoing, it is our opinion that, as of the
date hereof, the Merger Consideration to be paid by the Company in the Merger is
fair to the stockholders of the Company from a financial point of view.
Very truly yours,
/s/ WEDBUSH MORGAN SECURITIES
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WEDBUSH MORGAN SECURITIES
II-3
<PAGE> 163
ANNEX III
Amended & Restated 1996 Stock Option/Stock Issuance Agreement
<PAGE> 164
CARDIOVASCULAR DYNAMICS, INC.
1996 STOCK OPTION/STOCK ISSUANCE PLAN
(AS AMENDED AND RESTATED AS OF APRIL 8, 1997, MARCH 12, 1998 AND
NOVEMBER 3, 1998)
ARTICLE I
GENERAL PROVISIONS
I. PURPOSE OF THE PLAN
This 1996 Stock Option/Stock Issuance Plan is intended to promote
the interests of CardioVascular Dynamics, Inc., a Delaware corporation, by
providing eligible persons with the opportunity to acquire a proprietary
interest, or otherwise increase their proprietary interest, in the Corporation
as an incentive for them to remain in the service of the Corporation.
Capitalized terms shall have the meanings assigned to such terms in the attached
Appendix.
II. STRUCTURE OF THE PLAN
A. The Plan shall be divided into three separate equity programs:
(i) the Discretionary Option Grant Program under which
eligible persons may, at the discretion of the Plan Administrator, be
granted options to purchase shares of Common Stock,
(ii) the Stock Issuance Program under which eligible
persons may, at the discretion of the Plan Administrator, be issued
shares of Common Stock directly, either through the immediate purchase
of such shares or as a bonus for services rendered the Corporation (or
any Parent or Subsidiary), and
(iii) the Automatic Option Grant Program under which
eligible non-employee Board members shall automatically receive option
grants at periodic intervals to purchase shares of Common Stock.
B. The provisions of Articles One and Five shall apply to all
equity programs under the Plan and shall accordingly govern the interests of all
persons under the Plan.
III. ADMINISTRATION OF THE PLAN
A. The Primary Committee shall have sole and exclusive authority
to administer the Discretionary Option Grant and Stock Issuance Programs with
respect to Section 16 Insiders.
B. Administration of the Discretionary Option Grant and Stock
Issuance Programs with respect to all other persons eligible to participate in
those programs may, at the Board's discretion, be vested in the Primary
Committee or a Secondary Committee, or the Board may retain the power to
administer those programs with respect to all such persons.
<PAGE> 165
C. Members of the Primary Committee or any Secondary Committee
shall serve for such period of time as the Board may determine and may be
removed by the Board at any time. The Board may also at any time terminate the
functions of any Secondary Committee and reassume all powers and authority
previously delegated to such committee.
D. Each Plan Administrator shall, within the scope of its
administrative functions under the Plan, have full power and authority to
establish such rules and regulations as it may deem appropriate for proper
administration of the Discretionary Option Grant and Stock Issuance Programs and
to make such determinations under, and issue such interpretations of, the
provisions of such programs and any outstanding options or stock issuances
thereunder as it may deem necessary or advisable. Decisions of the Plan
Administrator within the scope of its administrative functions under the Plan
shall be final and binding on all parties who have an interest in the
Discretionary Option Grant or Stock Issuance Program under its jurisdiction or
any option or stock issuance thereunder.
E. Service on the Primary Committee or the Secondary Committee
shall constitute service as a Board member, and members of each such committee
shall accordingly be entitled to full indemnification and reimbursement as Board
members for their service on such committee. No member of the Primary Committee
or the Secondary Committee shall be liable for any act or omission made in good
faith with respect to the Plan or any option grants or stock issuances under the
Plan.
F. Administration of the Automatic Option Grant Program shall be
self-executing in accordance with the terms of that program, and no Plan
Administrator shall exercise any discretionary functions with respect to option
grants or stock issuances made thereunder.
IV. ELIGIBILITY
A. The persons eligible to participate in the Discretionary
Option Grant and Stock Issuance Programs are as follows:
(i) Employees,
(ii) non-employee members of the Board or the board of
directors of any Parent or Subsidiary, and
(iii) consultants and other independent advisors who
provide services to the Corporation (or any Parent or Subsidiary).
B. Each Plan Administrator shall, within the scope of its
administrative jurisdiction under the Plan, have full authority (subject to the
provisions of the Plan) to determine, (i) with respect to the option grants
under the Discretionary Option Grant Program, which eligible persons are to
receive option grants, the time or times when such option grants are to be made,
the number of shares to be covered by each such grant, the status of the granted
option as either an Incentive Option or a Non-Statutory Option, the time or
times at which each option is to become exercisable, the vesting schedule (if
any) applicable to the option shares and the maximum term for which the option
is to remain outstanding and (ii) with respect to stock issuances under the
Stock Issuance Program, which eligible persons are to receive stock issuances,
the time or times when such
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issuances are to be made, the number of shares to be issued to each Participant,
the vesting schedule (if any) applicable to the issued shares and the
consideration to be paid for such shares.
C. The Plan Administrator shall have the absolute discretion
either to grant options in accordance with the Discretionary Option Grant
Program or to effect stock issuances in accordance with the Stock Issuance
Program.
D. The individuals eligible to participate in the Automatic
Option Grant Program shall be limited to (i) those individuals who are serving
as non-employee Board members on the Underwriting Date, (ii) those individuals
who first become non-employee Board members after the Underwriting Date, whether
through appointment by the Board or election by the Corporation's stockholders,
and (iii) those individuals who are to continue to serve as non-employee Board
members after one or ore Annual Stockholders Meetings held after the
Underwriting Date. A non-employee Board member who has previously been in the
employ of the Corporation (or any Parent or Subsidiary) shall not be eligible to
receive an initial option grant under the Automatic Option Grant Program on the
Underwriting Date or (if later) at the time he or she first becomes a
non-employee Board member, but such individual shall be eligible to receive
periodic option grants under the Automatic Option Grant Program upon his or her
continued service as a non-employee Board member after one or more Annual
Stockholders Meetings.
V. STOCK SUBJECT TO THE PLAN
A. The stock issuable under the Plan shall be shares of
authorized but unissued or reacquired Common Stock, including shares repurchased
by the Corporation on the open market. The maximum number of shares of Common
Stock which may be issued over the term of the Plan shall not exceed 2,850,000
shares. Such authorized share reserve is comprised of (i) the number of shares
which remained available for issuance, as of the Plan Effective Date, under the
Predecessor Plan as last approved by the Corporation's stockholders, including
the shares subject to the outstanding options to be incorporated into the Plan
and (ii) an additional increase of 750,000 shares approved by the Board subject
to stockholder approval at the 1998 Special Meeting.
B. No one person participating in the Plan may receive options,
separately exercisable stock appreciation rights and direct stock issuances for
more than 800,000 shares of Common Stock in the aggregate over the term of the
Plan.
C. Shares of Common Stock subject to outstanding options
(including any options incorporated from the Predecessor Plan) shall be
available for subsequent issuance under the Plan to the extent (i) those options
expire or terminate for any reason prior to exercise in full or (ii) those
options are cancelled in accordance with the cancellation-regrant provisions of
Article Two. Unvested shares issued under the Plan and subsequently cancelled or
repurchased by the Corporation, at the original issue price paid per share,
pursuant to the Corporation's repurchase rights under the Plan shall be added
back to the number of shares of Common Stock reserved for issuance under the
Plan and shall accordingly be available for reissuance through one or more
subsequent option grants or direct stock issuances under the Plan. However,
should the exercise price of an option under the Plan (including any option
incorporated from the Predecessor Plan) be paid with shares of Common Stock or
should shares of Common Stock otherwise issuable under the Plan be withheld by
the Corporation in satisfaction of the withholding taxes incurred in connection
with the
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<PAGE> 167
exercise of an option or the vesting of a stock issuance under the Plan, then
the number of shares of Common Stock available for issuance under the Plan shall
be reduced by the gross number of shares for which the option is exercised or
which vest under the stock issuance, and not by the net number of shares of
Common Stock issued to the holder of such option or stock issuance.
D. Should any change be made to the Common Stock by reason of any
stock split, stock dividend, recapitalization, combination of shares, exchange
of shares or other change affecting the outstanding Common Stock as a class
without the Corporation's receipt of consideration, appropriate adjustments
shall be made to (i) the maximum number and/or class of securities issuable
under the Plan, (ii) the number and/or class of securities for which any one
person may be granted options, separately exercisable stock appreciation rights
and direct stock issuances in the aggregate under the Plan, (iii) the number
and/or class of securities for which automatic option grants are to be made
subsequently per Eligible Director under the Automatic Option Grant Program and
(iv) the number and/or class of securities and the exercise price per share in
effect under each outstanding option (including any option incorporated from the
Predecessor Plan).Such adjustments to the outstanding options are to be effected
in a manner which shall preclude the dilution or enlargement of benefits under
such options. The adjustments determined by the Plan Administrator shall be
final, binding and conclusive.
ARTICLE II
DISCRETIONARY OPTION GRANT PROGRAM
I. OPTION TERMS
Each option shall be evidenced by one or more documents in the
form approved by the Plan Administrator; provided, however, that each such
document shall comply with the terms specified below. Each document evidencing
an Incentive Option shall, in addition, be subject to the provisions of the Plan
applicable to such options.
A. Exercise Price.
1. The exercise price per share shall be fixed by the Plan
Administrator but shall not be less than eighty-five percent (85%) of the Fair
Market Value per share of Common Stock on the option grant date.
2. The exercise price shall become immediately due upon
exercise of the option and shall, subject to the provisions of Section I of
Article Five and the documents evidencing the option, be payable in one or more
of the forms specified below:
(i) cash or check made payable to the Corporation,
(ii) shares of Common Stock held for the requisite
period necessary to avoid a charge to the Corporation's earnings for
financial reporting purposes and valued at Fair Market Value on the
Exercise Date, or
(iii) to the extent the option is exercised for
vested shares, through a special sale and remittance procedure pursuant
to which the Optionee shall concurrently provide irrevocable written
instructions to (a) a Corporation-designated brokerage firm to
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effect the immediate sale of the purchased shares and remit to the
Corporation, out of the sale proceeds available on the settlement date,
sufficient funds to cover the aggregate exercise price payable for the
purchased shares plus all applicable Federal, state and local income and
employment taxes required to be withheld by the Corporation by reason of
such exercise and (b) the Corporation to deliver the certificates for
the purchased shares directly to such brokerage firm in order to
complete the sale.
Except to the extent such sale and remittance procedure is utilized,
payment of the exercise price for the purchased shares must be made on the
Exercise Date.
B. Exercise and Term of Options. Each option shall be exercisable
at such time or times, during such period and for such number of shares as shall
be determined by the Plan Administrator and set forth in the documents
evidencing the option. However, no option shall have a term in excess of ten
(10) years measured from the option grant date.
C. Effect of Termination of Service.
1. The following provisions shall govern the exercise of
any options held by the Optionee at the time of cessation of Service or death:
(i) Any option outstanding at the time of the
Optionee's cessation of Service for any reason shall remain exercisable
for such period of time thereafter as shall be determined by the Plan
Administrator and set forth in the documents evidencing the option, but
no such option shall be exercisable after the expiration of the option
term.
(ii) Any option exercisable in whole or in part by
the Optionee at the time of death may be exercised subsequently by the
personal representative of the Optionee's estate or by the person or
persons to whom the option is transferred pursuant to the Optionee's
will or in accordance with the laws of descent and distribution.
(iii) During the applicable post-Service exercise
period, the option may not be exercised in the aggregate for more than
the number of vested shares for which the option is exercisable on the
date of the Optionee's cessation of Service. Upon the expiration of the
applicable exercise period or (if earlier) upon the expiration of the
option term, the option shall terminate and cease to be outstanding for
any vested shares for which the option has not been exercised. However,
the option shall, immediately upon the Optionee's cessation of Service,
terminate and cease to be outstanding to the extent the option is not
otherwise at that time exercisable for vested shares.
(iv) Should the Optionee's Service be terminated
for Misconduct, then all outstanding options held by the Optionee shall
terminate immediately and cease to be outstanding.
(v) In the event of an Involuntary Termination
following a Corporate Transaction, the provisions of Section III of this
Article Two shall govern the period for which the outstanding options
are to remain exercisable following the Optionee's cessation of Service
and shall supersede any provisions to the contrary in this section.
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2. The Plan Administrator shall have the discretion,
exercisable either at the time an option is granted or at any time while the
option remains outstanding, to:
(i) extend the period of time for which the option
is to remain exercisable following the Optionee's cessation of Service
from the period otherwise in effect for that option to such greater
period of time as the Plan Administrator shall deem appropriate, but in
no event beyond the expiration of the option term, and/or
(ii) permit the option to be exercised, during the
applicable post-Service exercise period, not only with respect to the
number of vested shares of Common Stock for which such option is
exercisable at the time of the Optionee's cessation of Service but also
with respect to one or more additional installments in which the
Optionee would have vested under the option had the Optionee continued
in Service.
D. Stockholder Rights. The holder of an option shall have no
stockholder rights with respect to the shares subject to the option until such
person shall have exercised the option, paid the exercise price and become a
holder of record of the purchased shares.
E. Repurchase Rights. The Plan Administrator shall have the
discretion to grant options which are exercisable for unvested shares of Common
Stock. Should the Optionee cease Service while holding such unvested shares, the
Corporation shall have the right to repurchase, at the exercise price paid per
share, any or all of those unvested shares. The terms upon which such repurchase
right shall be exercisable (including the period and procedure for exercise and
the appropriate vesting schedule for the purchased shares) shall be established
by the Plan Administrator and set forth in the document evidencing such
repurchase right.
F. Limited Transferability of Options. During the lifetime of the
Optionee, the option shall be exercisable only by the Optionee and shall not be
assignable or transferable other than by will or by the laws of descent and
distribution following the Optionee's death. However, a Non-Statutory Option may
be assigned in whole or in part during the Optionee's lifetime in accordance
with the terms of a Qualified Domestic Relations Order. The assigned portion may
only be exercised by the person or persons who acquire a proprietary interest in
the option pursuant to such Qualified Domestic Relations Order. The terms
applicable to the assigned portion shall be the same as those in effect for the
option immediately prior to such assignment and shall be set forth in such
documents issued to the assignee as the Plan Administrator may deem appropriate.
II. INCENTIVE OPTIONS
The terms specified below shall be applicable to all Incentive
Options. Except as modified by the provisions of this Section II, all the
provisions of Articles One, Two and Five shall be applicable to Incentive
Options. Options which are specifically designated as Non-Statutory Options when
issued under the Plan shall not be subject to the terms of this Section II.
A. Eligibility. Incentive Options may only be granted to
Employees.
B. Exercise Price. The exercise price per share shall not be less
than one hundred percent (100%) of the Fair Market Value per share of Common
Stock on the option grant date.
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C. Dollar Limitation. The aggregate Fair Market Value of the
shares of Common Stock (determined as of the respective date or dates of grant)
for which one or more options granted to any Employee under the Plan (or any
other option plan of the Corporation or any Parent or Subsidiary) may for the
first time become exercisable as Incentive Options during any one (1) calendar
year shall not exceed the sum of One Hundred Thousand Dollars ($100,000).To the
extent the Employee holds two (2) or more such options which become exercisable
for the first time in the same calendar year, the foregoing limitation on the
exercisability of such options as Incentive Options shall be applied on the
basis of the order in which such options are granted.
D. 10% Stockholder. If any Employee to whom an Incentive Option
is granted is a 10% Stockholder, then the exercise price per share shall not be
less than one hundred ten percent (110%) of the Fair Market Value per share of
Common Stock on the option grant date, and the option term shall not exceed five
(5) years measured from the option grant date.
III. CORPORATE TRANSACTION/CHANGE IN CONTROL
A. In the event of any Corporate Transaction, each outstanding
option shall automatically accelerate so that each such option shall,
immediately prior to the effective date of the Corporate Transaction, become
fully exercisable for all of the shares of Common Stock at the time subject to
such option and may be exercised for any or all of those shares as fully-vested
shares of Common Stock. However, an outstanding option shall NOT so accelerate
if and to the extent:(i) such option is, in connection with the Corporate
Transaction, either to be assumed by the successor corporation (or parent
thereof) or to be replaced with a comparable option to purchase shares of the
capital stock of the successor corporation (or parent thereof), (ii) such option
is to be replaced with a cash incentive program of the successor corporation
which preserves the spread existing on the unvested option shares at the time of
the Corporate Transaction and provides for subsequent payout in accordance with
the same vesting schedule applicable to such option or (iii) the acceleration of
such option is subject to other limitations imposed by the Plan Administrator at
the time of the option grant. The determination of option comparability under
clause (i) above shall be made by the Plan Administrator, and its determination
shall be final, binding and conclusive.
B. All outstanding repurchase rights shall also terminate
automatically, and the shares of Common Stock subject to those terminated rights
shall immediately vest in full, in the event of any Corporate Transaction,
except to the extent: (i) those repurchase rights are to be assigned to the
successor corporation (or parent thereof) in connection with such Corporate
Transaction or (ii) such accelerated vesting is precluded by other limitations
imposed by the Plan Administrator at the time the repurchase right is issued.
C. The Plan Administrator shall have the discretion, exercisable
either at the time the option is granted or at any time while the option remains
outstanding, to provide for the automatic acceleration of one or more
outstanding options (and the automatic termination of one or more outstanding
repurchase rights with the immediate vesting of the shares of Common Stock
subject to those rights) upon the occurrence of a Corporate Transaction, whether
or not those options are to be assumed or replaced (or those repurchase rights
are to be assigned) in the Corporate Transaction. The Plan Administrator shall
also have the discretion to grant options which do not accelerate whether or not
such options are assumed (and to provide for repurchase rights that do not
terminate whether or not such rights are assigned) in connection with a
Corporate Transaction.
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D. Immediately following the consummation of the Corporate
Transaction, all outstanding options shall terminate and cease to be
outstanding, except to the extent assumed by the successor corporation (or
parent thereof).
E. Each option which is assumed in connection with a Corporate
Transaction shall be appropriately adjusted, immediately after such Corporate
Transaction, to apply to the number and class of securities which would have
been issuable to the Optionee in consummation of such Corporate Transaction had
the option been exercised immediately prior to such Corporate Transaction.
Appropriate adjustments to reflect such Corporate Transaction shall also be made
to (i) the number and/or class of securities available for issuance under the
Plan following the consummation of such Corporate Transaction, (ii) the exercise
price payable per share under each outstanding option, provided the aggregate
exercise price payable for such securities shall remain the same and (iii) the
maximum number of securities and/or class of securities for which any one person
may be granted stock options, separately exercisable stock appreciation rights
and direct stock issuances in the aggregate under the Plan.
F. The Plan Administrator shall have full power and authority to
grant options under the Discretionary Option Grant Program which will
automatically accelerate in the event the Optionee's Service subsequently
terminates by reason of an Involuntary Termination within a designated period
(not to exceed eighteen (18) months) following the effective date of any
Corporate Transaction in which those options are assumed or replaced and do not
otherwise accelerate. Any options so accelerated shall remain exercisable for
fully-vested shares until the earlier of (i) the expiration of the option term
or (ii) the expiration of the one (1)-year period measured from the effective
date of the Involuntary Termination. In addition, the Plan Administrator may
provide that one or more of the Corporation's outstanding repurchase rights with
respect to shares held by the Optionee at the time of such Involuntary
Termination shall immediately terminate, and the shares subject to those
terminated repurchase rights shall accordingly vest in full.
G. The Plan Administrator shall have full power and authority to
grant options under the Discretionary Option Grant Program which will
automatically accelerate in the event the Optionee's Service subsequently
terminates by reason of an Involuntary Termination within a designated period
(not to exceed eighteen (18) months) following the effective date of any Change
in Control. Each option so accelerated shall remain exercisable for fully-vested
shares until the earlier of (i) the expiration of the option term or (ii) the
expiration of the one (1)-year period measured from the effective date of the
Involuntary Termination. In addition, the Plan Administrator may provide that
one or more of the Corporation's outstanding repurchase rights with respect to
shares held by the Optionee at the time of such Involuntary Termination shall
immediately terminate, and the shares subject to those terminated repurchase
rights shall accordingly vest in full.
H. The portion of any Incentive Option accelerated in connection
with a Corporate Transaction or Change in Control shall remain exercisable as an
Incentive Option only to the extent the applicable One Hundred Thousand Dollar
($100,000) limitation is not exceeded. To the extent such dollar limitation is
exceeded, the accelerated portion of such option shall be exercisable as a
Non-Statutory Option under the Federal tax laws.
I. The grant of options under the Discretionary Option Grant
Program shall in no way affect the right of the Corporation to adjust,
reclassify, reorganize or otherwise change its
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capital or business structure or to merge, consolidate, dissolve, liquidate or
sell or transfer all or any part of its business or assets.
IV. CANCELLATION AND REGRANT OF OPTIONS
The Plan Administrator shall have the authority to effect, at any
time and from time to time, with the consent of the affected option holders, the
cancellation of any or all outstanding options under the Discretionary Option
Grant Program (including outstanding options incorporated from the Predecessor
Plan) and to grant in substitution new options covering the same or different
number of shares of Common Stock but with an exercise price per share based on
the Fair Market Value per share of Common Stock on the new grant date.
V. STOCK APPRECIATION RIGHTS
A. The Plan Administrator shall have full power and authority to
grant to selected Optionees tandem stock appreciation rights and/or limited
stock appreciation rights.
B. The following terms shall govern the grant and exercise of
tandem stock appreciation rights:
(i) One or more Optionees may be granted the right,
exercisable upon such terms as the Plan Administrator may establish, to
elect between the exercise of the underlying option for shares of Common
Stock and the surrender of that option in exchange for a distribution
from the Corporation in an amount equal to the excess of (a) the Fair
Market Value (on the option surrender date) of the number of shares in
which the Optionee is at the time vested under the surrendered option
(or surrendered portion thereof) over (b) the aggregate exercise price
payable for such shares.
(ii) No such option surrender shall be effective unless it
is approved by the Plan Administrator. If the surrender is so approved,
then the distribution to which the Optionee shall be entitled may be
made in shares of Common Stock valued at Fair Market Value on the option
surrender date, in cash, or partly in shares and partly in cash, as the
Plan Administrator shall in its sole discretion deem appropriate.
(iii) If the surrender of an option is rejected by the
Plan Administrator, then the Optionee shall retain whatever rights the
Optionee had under the surrendered option (or surrendered portion
thereof) on the option surrender date and may exercise such rights at
any time prior to the later of (a) five (5) business days after the
receipt of the rejection notice or (b) the last day on which the option
is otherwise exercisable in accordance with the terms of the documents
evidencing such option, but in no event may such rights be exercised
more than ten (10) years after the option grant date.
C. The following terms shall govern the grant and exercise of
limited stock appreciation rights:
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(i) One or more Section 16 Insiders may be granted limited
stock appreciation rights with respect to their outstanding options.
(ii) Upon the occurrence of a Hostile Take-Over, each such
individual holding one or more options with such a limited stock
appreciation right in effect shall have the unconditional right
(exercisable for a thirty (30)-day period following such Hostile
Take-Over) to surrender each such option to the Corporation, to the
extent the option is at the time exercisable for vested shares of Common
Stock. In return for the surrendered option, the Optionee shall receive
a cash distribution from the Corporation in an amount equal to the
excess of (a) the Take-Over Price of the shares of Common Stock which
are at the time vested under each surrendered option (or surrendered
portion thereof) over (b) the aggregate exercise price payable for such
shares. Such cash distribution shall be paid within five (5) days
following the option surrender date.
(iii) Neither the approval of the Plan Administrator nor
the consent of the Board shall be required in connection with such
option surrender and cash distribution.
(iv) The balance of the option (if any) shall continue in
full force and effect in accordance with the documents evidencing such
option.
ARTICLE III
STOCK ISSUANCE PROGRAM
I. STOCK ISSUANCE TERMS
Shares of Common Stock may be issued under the Stock Issuance
Program through direct and immediate issuances without any intervening option
grants. Each such stock issuance shall be evidenced by a Stock Issuance
Agreement which complies with the terms specified below.
A. Purchase Price.
1. The purchase price per share shall be fixed by the Plan
Administrator, but shall not be less than eighty-five percent (85%) of the Fair
Market Value per share of Common Stock on the issuance date.
2. Subject to the provisions of Section I of Article Five,
shares of Common Stock may be issued under the Stock Issuance Program for any of
the following items of consideration which the Plan Administrator may deem
appropriate in each individual instance:
(i) cash or check made payable to the Corporation,
or
(ii) past services rendered to the Corporation (or
any Parent or Subsidiary).
B. Vesting Provisions.
1. Shares of Common Stock issued under the Stock Issuance
Program may, in the discretion of the Plan Administrator, be fully and
immediately vested upon issuance or
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may vest in one or more installments over the Participant's period of Service or
upon attainment of specified performance objectives. The elements of the vesting
schedule applicable to any unvested shares of Common Stock issued under the
Stock Issuance Program, namely:
(i) the Service period to be completed by the
Participant or the performance objectives to be attained,
(ii) the number of installments in which the shares
are to vest,
(iii) the interval or intervals (if any) which are
to lapse between installments, and
(iv) the effect which death, Permanent Disability
or other event designated by the Plan Administrator is to have upon the
vesting schedule, shall be determined by the Plan Administrator and
incorporated into the Stock Issuance Agreement.
2. Any new, substituted or additional securities or other
property (including money paid other than as a regular cash dividend) which the
Participant may have the right to receive with respect to the Participant's
unvested shares of Common Stock by reason of any stock dividend, stock split,
recapitalization, combination of shares, exchange of shares or other change
affecting the outstanding Common Stock as a class without the Corporation's
receipt of consideration shall be issued subject to (i) the same vesting
requirements applicable to the Participant's unvested shares of Common Stock and
(ii) such escrow arrangements as the Plan Administrator shall deem appropriate.
3. The Participant shall have full stockholder rights with
respect to any shares of Common Stock issued to the Participant under the Stock
Issuance Program, whether or not the Participant's interest in those shares is
vested. Accordingly, the Participant shall have the right to vote such shares
and to receive any regular cash dividends paid on such shares.
4. Should the Participant cease to remain in Service while
holding one or more unvested shares of Common Stock issued under the Stock
Issuance Program or should the performance objectives not be attained with
respect to one or more such unvested shares of Common Stock, then those shares
shall be immediately surrendered to the Corporation for cancellation, and the
Participant shall have no further stockholder rights with respect to those
shares. To the extent the surrendered shares were previously issued to the
Participant for consideration paid in cash or cash equivalent (including the
Participant's purchase-money indebtedness), the Corporation shall repay to the
Participant the cash consideration paid for the surrendered shares and shall
cancel the unpaid principal balance of any outstanding purchase- money note of
the Participant attributable to the surrendered shares.
5. The Plan Administrator may in its discretion waive the
surrender and cancellation of one or more unvested shares of Common Stock (or
other assets attributable thereto) which would otherwise occur upon the
cessation of the Participant's Service or the non-attainment of the performance
objectives applicable to those shares. Such waiver shall result in the immediate
vesting of the Participant's interest in the shares of Common Stock as to which
the waiver applies. Such waiver may be effected at any time, whether before or
after the Participant's cessation of Service or the attainment or non-attainment
of the applicable performance objectives.
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II. CORPORATE TRANSACTION/CHANGE IN CONTROL
A. All outstanding cancellation rights under the Stock Issuance
Program shall terminate automatically, and all the shares of Common Stock
subject to those terminated rights shall immediately vest in full, in the event
of any Corporate Transaction, except to the extent (i) those cancellation rights
are assigned to the successor corporation (or parent thereof) in connection with
such Corporate Transaction or (ii) such accelerated vesting is precluded by
other limitations imposed in the Stock Issuance Agreement.
B. The Plan Administrator shall have the discretionary authority,
exercisable either at the time the unvested shares are issued or any time while
the Corporation's cancellation rights remain outstanding under the Stock
Issuance Program, to provide that those rights shall automatically terminate in
whole or in part, and the shares of Common Stock subject to those terminated
rights shall immediately vest, in the event the Participant's Service should
subsequently terminate by reason of an Involuntary Termination within a
designated period (not to exceed eighteen (18) months) following the effective
date of any Corporate Transaction in which those cancellation rights are
assigned to the successor corporation (or parent thereof).
C. The Plan Administrator shall have the discretionary authority,
exercisable either at the time the unvested shares are issued or any time while
the Corporation's cancellation rights remain outstanding under the Stock
Issuance Program, to provide that those rights shall automatically terminate in
whole or in part, and the shares of Common Stock subject to those terminated
rights shall immediately vest, in the event the Participant's Service should
subsequently terminate by reason of an Involuntary Termination within a
designated period (not to exceed eighteen (18) months) following the effective
date of any Change in Control.
D. The Plan Administrator shall have the discretion to provide
for cancellation rights with terms different from those in effect under Section
II.A. in connection with a Corporate Transaction.
III. SHARE ESCROW/LEGENDS
Unvested shares may, in the Plan Administrator's discretion, be
held in escrow by the Corporation until the Participant's interest in such
shares vests or may be issued directly to the Participant with restrictive
legends on the certificates evidencing those unvested shares.
ARTICLE IV
AUTOMATIC OPTION GRANT PROGRAM
I. OPTION TERMS
A. GRANT DATES. Option grants shall be made on the dates
specified below:
1. Each individual who is serving as a non-employee Board
member on the Underwriting Date shall automatically be granted, on the
Underwriting Date, a Non-Statutory Option to purchase 5,000 shares of Common
Stock, provided such individual has not previously been in the employ of the
Corporation (or any Parent or Subsidiary).
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2. Each individual who is first elected or appointed as a
non-employee Board member on or after the Underwriting Date shall automatically
be granted, on the date of such initial election or appointment, a Non-Statutory
Option to purchase 5,000 shares of Common Stock, provided such individual has
not previously been in the employ of the Corporation (or any Parent or
Subsidiary).
3. On the date of each Annual Stockholders Meeting held
after the Underwriting Date, each individual who is to continue to serve as an
Eligible Director, shall automatically be granted a Non-Statutory Option to
purchase an additional 5,000 shares of Common Stock, provided such individual
has served as a non-employee Board member for at least six (6) months. There
shall be no limit on the number of such 5,000-share option grants any one
Eligible Director may receive over his or her period of Board service.
B. EXERCISE PRICE.
1. The exercise price per share shall be equal to one
hundred percent (100%) of the Fair Market Value per share of Common Stock on the
option grant date.
2. The exercise price shall be payable in one or more of
the alternative forms authorized under the Discretionary Option Grant Program.
Except to the extent the sale and remittance procedure specified thereunder is
utilized, payment of the exercise price for the purchased shares must be made on
the Exercise Date.
C. OPTION TERM. Each option shall have a term of ten (10) years
measured from the option grant date.
D. EXERCISE AND VESTING OF OPTIONS. Each option shall be
immediately exercisable for any or all of the option shares. However, any shares
purchased under the option shall be subject to repurchase by the Corporation, at
the exercise price paid per share, upon the Optionee's cessation of Board
service prior to vesting in those shares. Each initial grant shall vest, and the
Corporation's repurchase right shall lapse, in a series of four (4) successive
equal annual installments over the Optionee's period of continued service as a
Board member, with the first such installment to vest upon the Optionee's
completion of one (1) year of Board service measured from the option grant date.
Each annual grant shall vest, and the Corporation's repurchase right shall
lapse, upon the Optionee's completion of one (1) year of Board service measured
from the option grant date.
E. EFFECT OF TERMINATION OF BOARD SERVICE. The following
provisions shall govern the exercise of any options held by the Optionee at the
time the Optionee ceases to serve as a Board member:
(i) The Optionee (or, in the event of Optionee's death,
the personal representative of the Optionee's estate or the person or
persons to whom the option is transferred pursuant to the Optionee's
will or in accordance with the laws of descent and distribution) shall
have a twelve (12)-month period following the date of such cessation of
Board service in which to exercise each such option.
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(ii) During the twelve (12)-month exercise period, the
option may not be exercised in the aggregate for more than the number of
vested shares of Common Stock for which the option is exercisable at the
time of the Optionee's cessation of Board service.
(iii) Should the Optionee cease to serve as a Board member
by reason of death or Permanent Disability, then all shares at the time
subject to the option shall immediately vest so that such option may,
during the twelve (12)-month exercise period following such cessation of
Board service, be exercised for all or any portion of those shares as
fully-vested shares of Common Stock.
(iv) In no event shall the option remain exercisable after
the expiration of the option term. Upon the expiration of the twelve
(12)-month exercise period or (if earlier) upon the expiration of the
option term, the option shall terminate and cease to be outstanding for
any vested shares for which the option has not been exercised. However,
the option shall, immediately upon the Optionee's cessation of Board
service for any reason other than death or Permanent Disability,
terminate and cease to be outstanding to the extent the option is not
otherwise at that time exercisable for vested shares.
II. CORPORATE TRANSACTION/CHANGE IN CONTROL/HOSTILE TAKE-OVER
A. In the event of any Corporate Transaction, the shares of
Common Stock at the time subject to each outstanding option but not otherwise
vested shall automatically vest in full so that each such option shall,
immediately prior to the effective date of the Corporate Transaction, become
fully exercisable for all of the shares of Common Stock at the time subject to
such option and may be exercised for all or any portion of those shares as
fully-vested shares of Common Stock. Immediately following the consummation of
the Corporate Transaction, each automatic option grant shall terminate and cease
to be outstanding, except to the extent assumed by the successor corporation (or
parent thereof).
B. In connection with any Change in Control, the shares of Common
Stock at the time subject to each outstanding option but not otherwise vested
shall automatically vest in full so that each such option shall, immediately
prior to the effective date of the Change in Control, become fully exercisable
for all of the shares of Common Stock at the time subject to such option and may
be exercised for all or any portion of those shares as fully-vested shares of
Common Stock. Each such option shall remain exercisable for such fully-vested
option shares until the expiration or sooner termination of the option term or
the surrender of the option in connection with a Hostile Take-Over.
C. Upon the occurrence of a Hostile Take-Over, the Optionee shall
have a thirty (30)-day period in which to surrender to the Corporation each
automatic option held by him or her. The Optionee shall in return be entitled to
a cash distribution from the Corporation in an amount equal to the excess of (i)
the Take-Over Price of the shares of Common Stock at the time subject to the
surrendered option (whether or not the Optionee is otherwise at the time vested
in those shares) over (ii) the aggregate exercise price payable for such shares.
Such cash distribution shall be paid within five (5) days following the
surrender of the option to the Corporation. No approval or consent of the Board
or any Plan Administrator shall be required in connection with such option
surrender and cash distribution.
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D. Each option which is assumed in connection with a Corporate
Transaction shall be appropriately adjusted, immediately after such Corporate
Transaction, to apply to the number and class of securities which would have
been issuable to the Optionee in consummation of such Corporate Transaction had
the option been exercised immediately prior to such Corporate Transaction.
Appropriate adjustments shall also be made to the exercise price payable per
share under each outstanding option, provided the aggregate exercise price
payable for such securities shall remain the same.
E. The grant of options under the Automatic Option Grant Program
shall in no way affect the right of the Corporation to adjust, reclassify,
reorganize or otherwise change its capital or business structure or to merge,
consolidate, dissolve, liquidate or sell or transfer all or any part of its
business or assets.
III. REMAINING TERMS
The remaining terms of each option granted under the Automatic
Option Grant Program shall be the same as the terms in effect for option grants
made under the Discretionary Option Grant Program.
ARTICLE V
MISCELLANEOUS
I. FINANCING
A. The Plan Administrator may permit any Optionee or Participant
to pay the option exercise price under the Discretionary Option Grant Program or
the purchase price for shares issued under the Stock Issuance Program by
delivering a promissory note payable in one or more installments. The terms of
any such promissory note (including the interest rate and the terms of
repayment) shall be established by the Plan Administrator in its sole
discretion. Promissory notes may be authorized with or without security or
collateral. In all events, the maximum credit available to the Optionee or
Participant may not exceed the sum of (i) the aggregate option exercise price or
purchase price payable for the purchased shares plus (ii) any Federal, state and
local income and employment tax liability incurred by the Optionee or the
Participant in connection with the option exercise or share purchase.
B. The Plan Administrator may, in its discretion, determine that
one or more such promissory notes shall be subject to forgiveness by the
Corporation in whole or in part upon such terms as the Plan Administrator may
deem appropriate.
II. TAX WITHHOLDING
A. The Corporation's obligation to deliver shares of Common Stock
upon the exercise of options or upon the issuance or vesting of such shares
under the Plan shall be subject to the satisfaction of all applicable Federal,
state and local income and employment tax withholding requirements.
B. The Plan Administrator may, in its discretion, provide any or
all holders of Non-Statutory Options or unvested shares of Common Stock under
the Plan (other than the options
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granted or the shares issued under the Automatic Option Grant Program) with the
right to use shares of Common Stock in satisfaction of all or part of the Taxes
incurred by such holders in connection with the exercise of their options or the
vesting of their shares. Such right may be provided to any such holder in either
or both of the following formats:
(i) Stock Withholding: The election to have the
Corporation withhold, from the shares of Common Stock otherwise issuable
upon the exercise of such Non-Statutory Option or the vesting of such
shares, a portion of those shares with an aggregate Fair Market Value
equal to the percentage of the Taxes (not to exceed one hundred percent
(100%)) designated by the holder.
(ii) Stock Delivery: The election to deliver to the
Corporation, at the time the Non-Statutory Option is exercised or the
shares vest, one or more shares of Common Stock previously acquired by
such holder (other than in connection with the option exercise or share
vesting triggering the Taxes) with an aggregate Fair Market Value equal
to the percentage of the Taxes (not to exceed one hundred percent
(100%)) designated by the holder.
III. EFFECTIVE DATE AND TERM OF THE PLAN
A. The Plan became effective with respect to the Discretionary
Option Grant and Stock Issuance Program on the Plan Effective Date. The
Automatic Option Grant Program became effective on the Underwriting Date. On
April 8, 1997, the Board amended the Plan to (i) increase the number of shares
available for issuance by 700,000 shares, (ii) provide that non-employee Board
members shall be eligible to participate in the Discretionary Option Grant and
the Stock Issuance Programs, (iii) eliminate the restriction that the
individuals who serve as Plan Administrator may not receive any discretionary
option grants or direct stock issuances from the Company while serving as Plan
Administrator or during the twelve month period preceding appointment as Plan
Administrator, (iv) require stockholder approval of future amendments to the
Plan only to the extent necessary to satisfy applicable laws or regulations, (v)
eliminate both the six month holding period requirement and the ten business day
"window" period requirement for the exercise of any stock appreciation rights
granted under the Plan and (vi) allow the shares issued under the Plan which are
subsequently reacquired by the Company pursuant to the Company's exercise of its
repurchase rights to be added back to the share reserve available for future
issuance under the Plan. The April 8, 1997 amendments to the Plan were
subsequently approved by the stockholders at the 1997 Annual Meeting. On March
12, 1998, the Board amended the Plan to increase the number of shares available
for issuance by an additional 200,000 shares, and the stockholders approved the
amendment at the 1998 Annual Meeting on May 19, 1998. On November 3, 1998, the
Board amended the Plan to increase the number of shares available for issuance
by an additional 750,000 shares. However, no options granted under the Plan on
the basis of such share increase may be exercised, and no shares shall be issued
thereunder, until the amendment to the Plan increasing the share reserve is
approved by the Corporation's stockholders at the 1998 Special Meeting. If such
stockholder approval is not obtained, then all options previously granted under
this Plan on the basis of such share increase shall terminate and cease to be
outstanding.
B. The Plan shall serve as the successor to the Predecessor Plan,
and no further option grants shall be made under the Predecessor Plan after the
Section 12(g) Registration Date.
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All options outstanding under the Predecessor Plan as of such date shall be
incorporated into the Plan at that time and shall be treated as outstanding
options under the Plan. However, each outstanding option so incorporated shall
continue to be governed solely by the terms of the documents evidencing such
option, and no provision of the Plan shall be deemed to affect or otherwise
modify the rights or obligations of the holders of such incorporated options
with respect to their acquisition of shares of Common Stock.
C. One or more provisions of the Plan, including (without
limitation) the option/vesting acceleration provisions of Article Two relating
to Corporate Transactions and Changes in Control, may, in the Plan
Administrator's discretion, be extended to one or more options incorporated from
the Predecessor Plan which do not otherwise contain such provisions.
D. The Plan shall terminate upon the earliest of (i) April 29,
2006, (ii) the date on which all shares available for issuance under the Plan
shall have been issued pursuant to the exercise of the options or the issuance
of shares (whether vested or unvested) under the Plan or (iii) the termination
of all outstanding options in connection with a Corporate Transaction. Upon such
Plan termination, all outstanding options and unvested stock issuances shall
continue to have force and effect in accordance with the provisions of the
documents evidencing such options or issuances.
IV. AMENDMENT OF THE PLAN
A. The Board shall have complete and exclusive power and
authority to amend or modify the Plan in any or all respects. However, no such
amendment or modification shall adversely affect any rights and obligations with
respect to options, stock appreciation rights or unvested stock issuances at the
time outstanding under the Plan unless the Optionee or the Participant consents
to such amendment or modification. In addition, certain amendments may require
stockholder approval pursuant to applicable laws and regulations.
B. Options to purchase shares of Common Stock may be granted
under the Discretionary Option Grant Program and shares of Common Stock may be
issued under the Stock Issuance Program that are in each instance in excess of
the number of shares then available for issuance under the Plan, provided any
excess shares actually issued under those programs are held in escrow until
there is obtained stockholder approval of an amendment sufficiently increasing
the number of shares of Common Stock available for issuance under the Plan. If
such stockholder approval is not obtained within twelve (12) months after the
date the first such excess grants or issuances are made, then (i) any
unexercised options granted on the basis of such excess shares shall terminate
and cease to be outstanding and (ii) the Corporation shall promptly refund to
the Optionees and the Participants the exercise or purchase price paid for any
excess shares issued under the Plan and held in escrow, together with interest
(at the applicable Short Term Federal Rate) for the period the shares were held
in escrow, and such shares shall thereupon be automatically cancelled and cease
to be outstanding.
V. USE OF PROCEEDS
Any cash proceeds received by the Corporation from the sale of
shares of Common Stock under the Plan shall be used for general corporate
purposes.
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VI. REGULATORY APPROVALS
A. The implementation of the Plan, the granting of any option or
stock appreciation right under the Plan and the issuance of any shares of Common
Stock (i) upon the exercise of any option or stock appreciation right or (ii)
under the Stock Issuance Program shall be subject to the Corporation's
procurement of all approvals and permits required by regulatory authorities
having jurisdiction over the Plan, the options and stock appreciation rights
granted under it and the shares of Common Stock issued pursuant to it.
B. No shares of Common Stock or other assets shall be issued or
delivered under the Plan unless and until there shall have been compliance with
all applicable requirements of Federal and state securities laws, including the
filing and effectiveness of the Form S-8 registration statement for the shares
of Common Stock issuable under the Plan, and all applicable listing requirements
of any stock exchange (or the Nasdaq National Market, if applicable) on which
Common Stock is then listed for trading.
VII. NO EMPLOYMENT/SERVICE RIGHTS
Nothing in the Plan shall confer upon the Optionee or the
Participant any right to continue in Service for any period of specific duration
or interfere with or otherwise restrict in any way the rights of the Corporation
(or any Parent or Subsidiary employing or retaining such person) or of the
Optionee or the Participant, which rights are hereby expressly reserved by each,
to terminate such person's Service at any time for any reason, with or without
cause.
ARTICLE VI
APPENDIX
The following definitions shall be in effect under the Plan:
A. AUTOMATIC OPTION GRANT PROGRAM shall mean the automatic option
grant program in effect under the Plan.
B. BOARD shall mean the Corporation's Board of Directors.
C. CHANGE IN CONTROL shall mean a change in ownership or control
of the Corporation effected through either of the following transactions:
(i) the acquisition, directly or indirectly, by any person
or related group of persons (other than the Corporation or a person that
directly or indirectly controls, is controlled by, or is under common
control with, the Corporation), of beneficial ownership (within the
meaning of Rule 13d-3 of the 1934 Act) of securities possessing more
than fifty percent (50%) of the total combined voting power of the
Corporation's outstanding securities pursuant to a tender or exchange
offer made directly to the Corporation's stockholders which the Board
does not recommend such stockholders to accept, or
(ii) a change in the composition of the Board over a
period of thirty-six (36) consecutive months or less such that a
majority of the Board members ceases, by reason of one or more contested
elections for Board membership, to be comprised of individuals
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who either (A) have been Board members continuously since the beginning
of such period or (B) have been elected or nominated for election as
Board members during such period by at least a majority of the Board
members described in clause (A) who were still in office at the time the
Board approved such election or nomination.
D. CODE shall mean the Internal Revenue Code of 1986, as amended.
E. COMMON STOCK shall mean the Corporation's common stock.
F. CORPORATE TRANSACTION shall mean either of the following
stockholder-approved transactions to which the Corporation is a party:
(i) a merger or consolidation in which securities
possessing more than fifty percent (50%) of the total combined voting
power of the Corporation's outstanding securities are transferred to a
person or persons different from the persons holding those securities
immediately prior to such transaction; or
(ii) the sale, transfer or other disposition of all or
substantially all of the Corporation's assets in complete liquidation or
dissolution of the Corporation.
G. CORPORATION shall mean CardioVascular Dynamics, Inc., a
Delaware corporation, and any corporate successor to all or substantially all of
the assets or voting stock of CardioVascular Dynamics, Inc. which shall by
appropriate action adopt the Plan.
H. DISCRETIONARY OPTION GRANT PROGRAM shall mean the
discretionary option grant program in effect under the Plan.
I. DOMESTIC RELATIONS ORDER shall mean any judgment, decree or
order (including approval of a property settlement agreement) which provides or
otherwise conveys, pursuant to applicable State domestic relations laws
(including community property laws), marital property rights to any spouse or
former spouse of the Optionee.
J. ELIGIBLE DIRECTOR shall mean a non-employee Board member
eligible to participate in the Automatic Option Grant Program in accordance with
the eligibility provisions of Article One.
K. EMPLOYEE shall mean an individual who is in the employ of the
Corporation (or any Parent or Subsidiary), subject to the control and direction
of the employer entity as to both the work to be performed and the manner and
method of performance.
L. EXERCISE DATE shall mean the date on which the Corporation
shall have received written notice of the option exercise.
M. FAIR MARKET VALUE per share of Common Stock on any relevant
date shall be determined in accordance with the following provisions:
(i) If the Common Stock is at the time traded on the
Nasdaq National Market, then the Fair Market Value shall be the closing
selling price per share of Common
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Stock on the date in question, as such price is reported by the National
Association of Securities Dealers on the Nasdaq National Market or any
successor system. If there is no closing selling price for the Common
Stock on the date in question, then the Fair Market Value shall be the
closing selling price on the last preceding date for which such
quotation exists.
(ii) If the Common Stock is at the time listed on any
Stock Exchange, then the Fair Market Value shall be the closing selling
price per share of Common Stock on the date in question on the Stock
Exchange determined by the Plan Administrator to be the primary market
for the Common Stock, as such price is officially quoted in the
composite tape of transactions on such exchange. If there is no closing
selling price for the Common Stock on the date in question, then the
Fair Market Value shall be the closing selling price on the last
preceding date for which such quotation exists.
(iii) For purposes of any option grants made on the
Underwriting Date, the Fair Market Value shall be deemed to be equal to
the price per share at which the Common Stock is sold in the initial
public offering pursuant to the Underwriting Agreement.
N. HOSTILE TAKE-OVER shall mean a change in ownership of the
Corporation effected through the following transaction:
(i) the acquisition, directly or indirectly, by any person
or related group of persons (other than the Corporation or a person that
directly or indirectly controls, is controlled by, or is under common
control with, the Corporation) of beneficial ownership (within the
meaning of Rule 13d-3 of the 1934 Act) of securities possessing more
than fifty percent (50%) of the total combined voting power of the
Corporation's outstanding securities pursuant to a tender or exchange
offer made directly to the Corporation's stockholders which the Board
does not recommend such stockholders to accept, and
(ii) more than fifty percent (50%) of the securities so
acquired are accepted from persons other than Section 16 Insiders.
O. INCENTIVE OPTION shall mean an option which satisfies the
requirements of Code Section 422.
P. INVOLUNTARY TERMINATION shall mean the termination of the
Service of any individual which occurs by reason of:
(i) such individual's involuntary dismissal or discharge
by the Corporation for reasons other than Misconduct, or
(ii) such individual's voluntary resignation following (A)
a change in his or her position with the Corporation which materially
reduces his or her level of responsibility, (B) a reduction in his or
her level of compensation (including base salary, fringe benefits and
participation in corporate-performance based bonus or incentive
programs) by more than fifteen percent (15%) or (C) a relocation of such
individual's place of employment by more than fifty (50) miles, provided
and only if such change, reduction or relocation is effected by the
Corporation without the individual's consent.
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<PAGE> 184
Q. MISCONDUCT shall mean the commission of any act of fraud,
embezzlement or dishonesty by the Optionee or Participant, any unauthorized use
or disclosure by such person of confidential information or trade secrets of the
Corporation (or any Parent or Subsidiary), or any other intentional misconduct
by such person adversely affecting the business or affairs of the Corporation
(or any Parent or Subsidiary) in a material manner. The foregoing definition
shall not be deemed to be inclusive of all the acts or omissions which the
Corporation (or any Parent or Subsidiary) may consider as grounds for the
dismissal or discharge of any Optionee, Participant or other person in the
Service of the Corporation (or any Parent or Subsidiary).
R. 1934 ACT shall mean the Securities Exchange Act of 1934, as
amended.
S. NON-STATUTORY OPTION shall mean an option not intended to
satisfy the requirements of Code Section 422.
T. OPTIONEE shall mean any person to whom an option is granted
under the Discretionary Option Grant or Automatic Option Grant Program.
U. PARENT shall mean any corporation (other than the Corporation)
in an unbroken chain of corporations ending with the Corporation, provided each
corporation in the unbroken chain (other than the Corporation) owns, at the time
of the determination, stock possessing fifty percent (50%) or more of the total
combined voting power of all classes of stock in one of the other corporations
in such chain.
V. PARTICIPANT shall mean any person who is issued shares of
Common Stock under the Stock Issuance Program.
W. PERMANENT DISABILITY OR PERMANENTLY DISABLED shall mean the
inability of the Optionee or the Participant to engage in any substantial
gainful activity by reason of any medically determinable physical or mental
impairment expected to result in death or to be of continuous duration of twelve
(12) months or more. However, solely for the purposes of the Automatic Option
Grant Program, Permanent Disability or Permanently Disabled shall mean the
inability of the non-employee Board member to perform his or her usual duties as
a Board member by reason of any medically determinable physical or mental
impairment expected to result in death or to be of continuous duration of twelve
(12) months or more.
X. PLAN shall mean the Corporation's 1996 Stock Option/Stock
Issuance Plan, as set forth in this document.
Y. PLAN ADMINISTRATOR shall mean the particular entity, whether
the Primary Committee, the Board or the Secondary Committee, which is authorized
to administer the Discretionary Option Grant and Stock Issuance Programs with
respect to one or more classes of eligible persons, to the extent such entity is
carrying out its administrative functions under those programs with respect to
the persons under its jurisdiction.
Z. PLAN EFFECTIVE DATE shall mean April 30, 1996, the date on
which the Plan was adopted by the Board.
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<PAGE> 185
AA. PREDECESSOR PLAN shall mean the Corporation's 1995 Stock
Option Plan.
AB. PRIMARY COMMITTEE shall mean the committee of two (2) or more
non-employee Board members appointed by the Board to administer the
Discretionary Option Grant and Stock Issuance Programs with respect to Section
16 Insiders.
AC. QUALIFIED DOMESTIC RELATIONS ORDER shall mean a Domestic
Relations Order which substantially complies with the requirements of Code
Section 414(p).The Plan Administrator shall have the sole discretion to
determine whether a Domestic Relations Order is a Qualified Domestic Relations
Order.
AD. SECONDARY COMMITTEE shall mean a committee of two (2) or more
Board members appointed by the Board to administer the Discretionary Option
Grant and Stock Issuance Programs with respect to eligible persons other than
Section 16 Insiders.
AE. SECTION 16 INSIDER shall mean an officer or director of the
Corporation subject to the short-swing profit liabilities of Section 16 of the
1934 Act.
AF. SECTION 12(G) REGISTRATION DATE shall mean the first date on
which the Common Stock is first registered under Section 12(g) of the 1934 Act.
AG. SERVICE shall mean the performance of services to the
Corporation (or any Parent or Subsidiary) by a person in the capacity of an
Employee, a non-employee member of the board of directors or a consultant or
independent advisor, except to the extent otherwise specifically provided in the
documents evidencing the option grant or stock issuance.
AH. STOCK EXCHANGE shall mean either the American Stock Exchange
or the New York Stock Exchange.
AI. STOCK ISSUANCE AGREEMENT shall mean the agreement entered
into by the Corporation and the Participant at the time of issuance of shares of
Common Stock under the Stock Issuance Program.
AJ. STOCK ISSUANCE PROGRAM shall mean the stock issuance program
in effect under the Plan.
AK. SUBSIDIARY shall mean any corporation (other than the
Corporation) in an unbroken chain of corporations beginning with the
Corporation, provided each corporation (other than the last corporation) in the
unbroken chain owns, at the time of the determination, stock possessing fifty
percent (50%) or more of the total combined voting power of all classes of stock
in one of the other corporations in such chain.
AL. TAKE-OVER PRICE shall mean the greater of (i) the Fair Market
Value per share of Common Stock on the date the option is surrendered to the
Corporation in connection with a Hostile Take-Over or (ii) the highest reported
price per share of Common Stock paid by the tender offeror in effecting such
Hostile Take-Over. However, if the surrendered option is an Incentive Option,
the Take-Over Price shall not exceed the clause (i) price per share.
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<PAGE> 186
AM. TAXES shall mean the Federal, state and local income and
employment tax liabilities incurred by the holder of Non-Statutory Options or
unvested shares of Common Stock in connection with the exercise of those options
or the vesting of those shares.
AN. 10% STOCKHOLDER shall mean the owner of stock (as determined
under Code Section 424(d)) possessing more than ten percent (10%) of the total
combined voting power of all classes of stock of the Corporation (or any Parent
or Subsidiary).
AO. UNDERWRITING AGREEMENT shall mean the agreement between the
Corporation and the underwriter or underwriters managing the initial public
offering of the Common Stock.
AP. UNDERWRITING DATE shall mean the date on which the
Underwriting Agreement is executed and priced in connection with the initial
public offering of the Common Stock.
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<PAGE> 187
PROXY
CARDIOVASCULAR DYNAMICS, INC.
SPECIAL MEETING OF STOCKHOLDERS, JANUARY 14, 1999
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned revokes all previous proxies, acknowledges receipt of the Notice
of Special Meeting of Stockholders to be held on January 14, 1999 and the Proxy
Statement and appoints Jeffrey O'Donnell and Stephen Kroll, or either of them,
the proxy of the undersigned, with full power of substitution, to vote all
shares of Common Stock of CardioVascular Dynamics, Inc. ("CVD") which the
undersigned is entitled to vote, either on his or her own behalf or on behalf of
an entity or entities, at the Special Meeting of Stockholders of CVD to be held
at CVD's executive offices at 13700 Alton Parkway, Suite 160, Irvine, California
92618 on Thursday, January 14, 1999 at 10:00 a.m., and at any adjournment or
postponement thereof, and to vote in their discretion on such other business as
may properly come before the Special Meeting and any postponement or adjournment
thereof.
(CONTINUED AND TO BE SIGNED ON REVERSE SIDE.)
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- FOLD AND DETACH HERE -
Please mark your votes as indicated in /X/ this example
1. ISSUANCE OF CVD COMMON STOCK IN EXCHANGE FOR THE OUTSTANDING CAPITAL
STOCK OF RADIANCE MEDICAL SYSTEMS, INC. IN THE RELATED MERGER OF
RADIANCE WITH AND INTO A WHOLLY-OWNED SUBSIDIARY OF CVD.
FOR AGAINST ABSTAIN
/ / / / / /
2. AMENDMENT TO THE COMPANY'S AMENDED & RESTATED CERTIFICATE OF
INCORPORATION TO CHANGE CVD'S NAME FROM CARDIOVASCULAR DYNAMICS, INC. TO
RADIANCE MEDICAL SYSTEMS, INC.
FOR AGAINST ABSTAIN
/ / / / / /
3. AMENDMENT TO CVD'S 1996 STOCK OPTION/STOCK ISSUANCE PLAN TO EFFECT AN
INCREASE IN THE POOL OF SHARES AVAILABLE FOR ISSUANCE BY AN ADDITIONAL
750,000 SHARES OF COMMON STOCK.
FOR AGAINST ABSTAIN
/ / / / / /
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<PAGE> 188
The Independent Committee of Board of Directors recommends a vote FOR
Proposal 1, and the Board of Directors recommends a vote FOR each of the other
proposals set forth above. This Proxy, when properly executed will be voted as
specified above. This Proxy will be voted FOR Proposals 1, 2 and 3 if no
specification is made. This proxy will also be voted at the discretion of the
proxy holders on such matters other than the three specific items as may come
before the meeting.
PLEASE RETURN YOUR EXECUTED PROXY TO CVD'S TRANSFER AGENT IN THE ENCLOSED
ENVELOPE, OR, IF NECESSARY, DELIVER IT TO CVD, ATTENTION: SECRETARY.
Please print the name(s) appearing on each share certificate(s) over which you
have voting authority:
--------------------------------------------------
(Print name(s) as it (they) appear on certificate)
Dated:_____________________ Signature(s)______________________________________
Please sign exactly as your name(s) is (are) shown on the share certificate to
which the Proxy applies. When shares are held by joint tenants, both should
sign. When signing as attorney, executor, administrator, trustee or guardian,
please give full title, as such. If a corporation, please sign in full corporate
name by the President or another authorized officer. If a partnership, please
sign in the partnership name by an authorized person.
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- FOLD AND DETACH HERE -
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