AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 22, 1998
REGISTRATION NO. 333-
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- --------------------------------------------------------------------------------
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
PHARMANETICS, INC.
(Exact name of registrant as specified in its charter)
---------------
<TABLE>
<CAPTION>
NORTH CAROLINA 3845 56-2098302
<S> <C> <C>
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
5301 DEPARTURE DRIVE
RALEIGH, NORTH CAROLINA 27616
(919) 954-9871
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
JOHN P. FUNKHOUSER
PHARMANETICS, INC.
5301 DEPARTURE DRIVE
RALEIGH, NORTH CAROLINA 27616
(919) 954-9871
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------
COPIES TO:
DONALD R. REYNOLDS, ESQ.
KEVIN A. PRAKKE, ESQ.
WYRICK ROBBINS YATES & PONTON LLP
4101 LAKE BOONE TRAIL, SUITE 300
RALEIGH, NORTH CAROLINA 27607
(919) 781-4000
---------------
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable
after the registration statement becomes effective and upon consummation of the
transaction described herein.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instructions, please check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, as amended (the
"Securities Act"), check the following box and list the Securities Act
registration statement number of the earlier of effective registration
statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
---------------
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
TITLE OF EACH CLASS PROPOSED MAXIMUM PROPOSED MAXIMUM
OF SECURITIES TO AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
BE REGISTERED REGISTERED(1) PER SHARE(2) OFFERING PRICE(2) REGISTRATION FEE(3)
<S> <C> <C> <C> <C>
Common Stock, no par
value per share ... 7,436,724 shares $ 3.94 $ 29,300,692.56 $ 8,145.59
</TABLE>
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(1) Represents the anticipated number of shares of the Registrant's Common
Stock to be exchanged on a one-for-one basis for all of the outstanding
shares of Common Stock of Cardiovascular Diagnostics, Inc., currently the
Registrant's parent company ("CVDI"), in connection with the
reorganization.
(2) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457(c) based on $3.94 per share, the average of the
high and low prices of CVDI's Common Stock on October 15, 1998.
(3) $8,846.60 previously paid in connection with CVDI's filing of preliminary
proxy materials with the SEC under cover of Schedule 14A on August 21,
1998.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE
ON SUCH DATE AS THE SEC, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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<PAGE>
(A redherring appears on the left-hand side of this page, rotated 90 degrees.
Text follows.)
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE
BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION
OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE
SECURITIES LAWS OF ANY SUCH STATE.
CARDIOVASCULAR DIAGNOSTICS, INC.
PROXY STATEMENT
FOR SPECIAL MEETING OF SHAREHOLDERS
---------------
PROSPECTUS FOR
7,436,724 SHARES OF
PHARMANETICS, INC. COMMON STOCK
---------------
Cardiovascular Diagnostics, Inc., a North Carolina corporation ("CVDI" or
the "COMPANY"), and PharmaNetics, Inc., a North Carolina corporation and a
newly-formed wholly owned subsidiary of the Company ("HOLDING COMPANY"), have
filed with the Securities and Exchange Commission (the "COMMISSION") under the
Securities Act of 1933 (the "SECURITIES ACT") a Registration Statement on Form
S-4 (the "REGISTRATION STATEMENT") relating to the issuance of 7,436,724 shares
of Common Stock of Holding Company ("HOLDING COMPANY COMMON STOCK") in
connection with an Agreement and Plan of Merger, dated July 31, 1998 (the
"MERGER AGREEMENT"), which provides, among other things, for a reorganization
(the "REORGANIZATION") whereby the Company will become a wholly owned
subsidiary of Holding Company. Under the Merger Agreement, each outstanding
share of CVDI Common Stock would automatically be converted into one share of
Holding Company Common Stock. The Merger Agreement has been unanimously
approved and adopted by the Company's Board of Directors and is herewith
submitted to the Company's shareholders for their consideration and vote at the
Special Meeting referred to below. All holders of CVDI Common Stock will be
entitled to dissenters' rights.
This Prospectus constitutes a part of the Registration Statement. This
Prospectus also constitutes the Proxy Statement being furnished to the
Company's shareholders in connection with the solicitation by the CVDI Board of
proxies for use at the Special Meeting of the shareholders of CVDI to be held
on December 1, 1998 at 10:00 a.m., at the Company's principal executive office
at 5301 Departure Drive, Raleigh, North Carolina (the "MEETING"). At the
Meeting, shareholders will be asked to consider and vote on approval of the
Merger Agreement, along with a proposal to amend the Company's 1995 Stock Plan
to increase the number of shares of Common Stock reserved for issuance
thereunder by 350,000 shares (the "SHARE AMOUNT AMENDMENT"). The term "Proxy
Statement" as used herein refers to both this Prospectus and Proxy Statement.
This Proxy Statement and the accompanying form of proxy were first mailed to
shareholders on or about October 27, 1998.
---------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS
PROXY STATEMENT/PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
---------------
The date of this Proxy Statement is October 27, 1998
<PAGE>
CARDIOVASCULAR DIAGNOSTICS, INC.
5301 DEPARTURE DRIVE
RALEIGH, NORTH CAROLINA 27616
----------------------------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD DECEMBER 1, 1998
----------------------------------------
TO THE SHAREHOLDERS OF CARDIOVASCULAR DIAGNOSTICS, INC.:
You are invited to a Special Meeting of Shareholders of the Company to be
held at the Company's principal executive office at 5301 Departure Drive,
Raleigh, North Carolina, on Tuesday, December 1, 1998, at 10:00 a.m. At the
meeting, we will vote on:
1. An Agreement and Plan of Merger providing for the merger of the Company
with a wholly owned subsidiary of PharmaNetics, Inc., a North Carolina
corporation organized for the purpose of becoming a holding company for
the Company (the "Holding Company"), pursuant to which all of the
Company's shareholders will become shareholders of Holding Company on a
share-for-share basis and the Company will become a wholly owned
subsidiary of Holding Company;
2. A 350,000 share increase in the number of shares of Common Stock
reserved for issuance under the Company's 1995 Stock Plan; and
3. Such other matters as may properly come before the meeting.
For more details, please read the enclosed Proxy Statement/Prospectus.
The Board of Directors has fixed the close of business on October 12,
1998, as the record date for the determination of shareholders entitled to
notice of and to vote at the meeting. To assure your representation at the
meeting, please mark, sign, date and return the enclosed proxy card as promptly
as possible in the enclosed postage-prepaid envelope. You may vote in person at
the meeting, even if you already returned a proxy.
IMPORTANT -- YOUR PROXY IS ENCLOSED
Raleigh, North Carolina
October 27, 1998
By Order of the Board of Directors
/s/ JOHN P. FUNKHOUSER
JOHN P. FUNKHOUSER, PRESIDENT AND CHIEF EXECUTIVE OFFICER
<PAGE>
CARDIOVASCULAR DIAGNOSTICS, INC.
PROXY STATEMENT/PROSPECTUS
TABLE OF CONTENTS
<TABLE>
<S> <C>
WHERE YOU CAN FIND MORE INFORMATION ................................................. iii
INTRODUCTION ........................................................................ 1
SUMMARY ............................................................................. 2
Proposed Restructuring ............................................................ 2
Special Meeting ................................................................... 2
Purpose of Meeting ................................................................ 2
Record Date; Vote Required ........................................................ 2
Effects of the Reorganization ..................................................... 3
Reasons for the Reorganization .................................................... 3
Share Exchange .................................................................... 3
Related Events; Holding Company Charter Documents ................................. 3
Rights of Dissenting Shareholders ................................................. 4
Federal Income Tax Consequences of the Reorganization ............................. 4
Conditions and Termination ........................................................ 4
Business of CVDI, Holding Company and Merger Sub .................................. 4
Expenses of the Reorganization .................................................... 4
PROPOSAL NO. 1 -- APPROVAL OF THE REORGANIZATION .................................... 5
General ........................................................................... 5
Effects of the Reorganization ..................................................... 5
Merger Share Exchange ............................................................. 5
Exchange Method ................................................................... 5
Operation and Management of Holding Company and CVDI after the Reorganization ..... 6
CVDI Board Approval of and Reasons for the Reorganization ......................... 6
Recommendation .................................................................... 6
Vote Required ..................................................................... 6
Charter Documents ................................................................. 7
Related Events .................................................................... 7
Conditions to the Reorganization; Termination ..................................... 7
Amendments and Waivers ............................................................ 8
Effective Time .................................................................... 8
Expenses of the Reorganization .................................................... 8
Federal Income Tax Consequences of the Merger ..................................... 8
Accounting Treatment of the Reorganization ........................................ 10
Restrictions on Resale of Holding Company Common Stock ............................ 10
DISSENTERS' RIGHTS OF CVDI SHAREHOLDERS ............................................. 11
INFORMATION RELATING TO MERGER SUB .................................................. 12
INFORMATION RELATING TO HOLDING COMPANY ............................................. 12
INFORMATION RELATING TO CVDI ........................................................ 13
Business of CVDI .................................................................. 13
Recent Developments ............................................................... 13
Industry Overview ................................................................. 14
Technology ........................................................................ 14
Products .......................................................................... 14
Sales And Marketing ............................................................... 16
Research And Development .......................................................... 18
Competition ....................................................................... 18
Patents And Other Intellectual Property ........................................... 18
Licenses .......................................................................... 19
Manufacturing ..................................................................... 19
Government Regulation ............................................................. 20
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
Reimbursement .......................................................................... 23
Coeur's Business ....................................................................... 24
Product Liability And Insurance ........................................................ 24
Employees .............................................................................. 25
Facilities ............................................................................. 25
Legal Proceedings ...................................................................... 25
Selected Financial Data of CVDI ........................................................ 26
Management's Discussion and Analysis of Financial Condition and Results of Operations .. 27
Management ............................................................................. 31
Principal Shareholders ................................................................. 32
Compensation of Executive Officers ..................................................... 34
Compensation of Directors .............................................................. 35
Report of the Compensation Committee on Executive Compensation ......................... 35
Compensation Committee Interlocks and Insider Participation ............................ 37
Certain Transactions ................................................................... 37
Market For Registrant's Common Equity and Related Stockholder Matters .................. 38
PROPOSAL NO. 2 -- APPROVAL OF AMENDMENT TO THE 1995 STOCK PLAN ........................... 38
General ................................................................................ 38
Tax Consequences Of Options ............................................................ 39
Proposed Amendment ..................................................................... 39
Vote Required .......................................................................... 39
SOLICITATION OF PROXIES .................................................................. 40
DEADLINE FOR SHAREHOLDER PROPOSALS ....................................................... 40
LEGAL MATTERS ............................................................................ 40
EXPERTS .................................................................................. 40
OTHER MATTERS ............................................................................ 40
CONSOLIDATED FINANCIAL STATEMENTS ........................................................ F-1
APPENDICES:
Appendix A -- Agreement and Plan of Merger ............................................. A-1
Appendix B -- Articles of Incorporation of Holding Company ............................. B-1
Appendix C -- Bylaws of Holding Company ................................................ C-1
Appendix D -- Article 13 of the North Carolina Business Corporation Act ................ D-1
</TABLE>
ii
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
The Company is, and after the Reorganization the Holding Company will be,
subject to the informational requirements of the Securities Exchange Act of
1934, as amended (the "Exchange Act"). In accordance with the Exchange Act, the
Company files reports, proxy statements, and other information with the
Commission.
Holding Company has filed a Registration Statement on Form S-4 with the
Commission under the Securities Act with respect to the shares of Holding
Company Common Stock to be issued upon consummation of the Reorganization. This
Proxy Statement/Prospectus does not contain all the information set forth in
the Registration Statement and the exhibits thereto, certain portions of which
have been omitted as permitted by the rules and regulations of the Commission.
Copies of the Registration Statement (including such omitted portions) are
available from the Commission upon payment of prescribed rates. For further
information, reference is made to the Registration Statement and the exhibits
filed therewith. Although, statements contained in this Proxy
Statement/Prospectus relating to the contents of any contract or other document
referred to herein or therein disclose all material features thereof, as they
relate to shareholders, such statements are not necessarily complete, and in
each instance reference is made to the copy of such contract or other document
filed as an exhibit to the Registration Statement or such other document, each
such statement being qualified in all respects by such reference.
This filed material can be inspected and copied at the public reference
facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the following Regional Offices of the
Commission: Chicago Regional Office (Suite 1400, Citicorp Center, 500 West
Madison Street, Chicago, Illinois 60661) and New York Regional Office (Seven
World Trade Center, New York, New York 10048). Copies of such material may be
obtained by mail from the public reference facilities maintained by the
Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, at
prescribed rates. In addition, such material can be inspected at the offices of
the National Association of Securities Dealers, Inc. (the "NASD"), 1735 K
Street, N.W., Washington D.C. 20006. Such material may also be accessed through
the Commission's home page on the World Wide Web at http:\\www.sec.gov.
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTATION
NOT CONTAINED IN THIS PROXY STATEMENT/
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION SHOULD
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS PROXY STATEMENT/PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO
PURCHASE, THE SECURITIES OFFERED BY THIS PROXY STATEMENT/PROSPECTUS, OR THE
SOLICITATION OF A PROXY, IN ANY JURISDICTION, TO OR FROM ANY PERSON TO WHOM IT
IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION OF AN OFFER OR PROXY
SOLICITATION IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS PROXY
STATEMENT/PROSPECTUS NOR ANY DISTRIBUTION OF SECURITIES MADE HEREUNDER SHALL,
UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN
THE AFFAIRS OF THE COMPANY SINCE THE DATE OF THIS PROXY STATEMENT/PROSPECTUS.
iii
<PAGE>
CARDIOVASCULAR DIAGNOSTICS, INC.
PROXY STATEMENT
---------------
INTRODUCTION
This Proxy Statement is furnished to the Company's shareholders in
connection with the solicitation by the Company's Board of proxies for use at
the Special Meeting of Shareholders of the Company to be held on December 1,
1998 at 10:00 a.m. (local time) at the Company's principal executive office at
5301 Departure Drive, Raleigh, North Carolina, to consider and act upon the
matters set forth herein and in the accompanying Notice of Meeting of
Shareholders. These proxy solicitation materials were mailed to all of the
Company's shareholders on or about October 27, 1998.
The Meeting has been called to consider and vote upon the approval of the
Merger Agreement, a copy of which is attached hereto as Appendix A, between the
Company, Holding Company and CVDI Merger Corporation, a North Carolina
corporation wholly owned by Holding Company ("MERGER SUB"). The Merger
Agreement provides, among other things, for the Reorganization whereby the
Company will become a wholly owned subsidiary of Holding Company, which will
own all of the capital stock of the Company. Under the Merger Agreement, each
outstanding share of CVDI Common Stock will automatically be converted into one
share of Holding Company Common Stock.
Copies of the Merger Agreement and the Articles of Incorporation and the
Bylaws of Holding Company are attached hereto as APPENDICES A, B and C,
respectively.
The Proxy accompanying this Proxy Statement is solicited by the Company's
Board of Directors for use at the Meeting. Holders of record of CVDI Common
Stock at the close of business on October 12, 1998 are the only shareholders
entitled to notice of and to vote at the Special Meeting. Any proxy may be
revoked by a shareholder at any time before it is exercised by attending the
Meeting and voting in person, or by delivering to Paul T. Storey at the Company
either written notice of revocation or a duly executed proxy bearing a date
later than that of the previous proxy.
WHETHER OR NOT YOU EXPECT TO ATTEND THE MEETING, PLEASE
COMPLETE, DATE AND SIGN THE ENCLOSED PROXY AND RETURN IT
PROMPTLY IN ORDER TO ASSURE REPRESENTATION OF YOUR SHARES.
1
<PAGE>
SUMMARY
THE FOLLOWING IS A SUMMARY OF CERTAIN INFORMATION SET FORTH IN THIS PROXY
STATEMENT. THE SUMMARY DOES NOT PURPORT TO BE COMPLETE AND SHOULD BE READ IN
CONJUNCTION WITH AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE MORE
DETAILED INFORMATION APPEARING ELSEWHERE OR INCORPORATED BY REFERENCE IN THIS
PROXY STATEMENT AND IN THE APPENDICES HERETO.
PROPOSED RESTRUCTURING
Holding Company has been organized to become the holding company for, and
the direct owner of, CVDI. The formation of the holding company structure will
be achieved by the merger of Merger Sub, a newly formed subsidiary of Holding
Company, into CVDI. In the Reorganization, the holders of CVDI Common Stock
immediately prior to the Reorganization will become the holders of Holding
Company Common Stock immediately after the Reorganization, and immediately
after the Reorganization, Holding Company will become the sole holder of CVDI
Common Stock.
The following diagrams illustrate the present and proposed corporate
structures of the Company and Holding Company before and after the
Reorganization.
(A flow chart appears here with the following text.)
Present Structure Proposed Structure
Public Shareholders Public Shareholders
CVDI Holding Company
Coeur (Pharmanetics, Inc.)
merge Labs
Holding Company
(Pharmanetics, Inc.)
CVDI
Merger Sub Coeur
Labs
SPECIAL MEETING
This Proxy Statement is being furnished by the Company's Board of
Directors to the shareholders for their use in evaluating how to vote their
shares at a Special Meeting of shareholders to be held on December 1, 1998 at
10:00 a.m. (local time) at the Company's principal executive office at 5301
Departure Drive, Raleigh, North Carolina.
PURPOSE OF MEETING
The Meeting has been called to consider and vote upon approval of the
Merger Agreement, the Reorganization, the Share Amount Amendment and all
related transactions. Approval of the Merger Agreement is deemed to constitute
approval of the Reorganization, the provisions of the Articles of Merger
required to be filed with the North Carolina Secretary of State, approval of
the Holding Company Articles of Incorporation and Bylaws, and election of the
current directors of the Company as directors of the Holding Company.
RECORD DATE; VOTE REQUIRED
The record date for the determination of the shareholders entitled to
notice of and to vote at the Meeting (the "RECORD DATE") is the close of
business on October 12, 1998. At the Record Date, there were issued and
outstanding 7,436,724 shares
2
<PAGE>
of CVDI Common Stock. At the Record Date, the directors and executive officers
of CVDI beneficially owned approximately 0.2% of the shares of CVDI Common
Stock entitled to vote at the Meeting. Shareholders will be entitled to one
vote per share of CVDI Common Stock held as of the Record Date on all matters
coming before the Meeting.
Pursuant to the terms of the Merger Agreement and the North Carolina
Business Corporation Act, approval of the Reorganization requires the
affirmative vote of the holders of at least a majority of the shares of CVDI
Common Stock outstanding on the Record Date. Accordingly, abstentions and
broker non-votes will have the effect of votes against the Reorganization.
Approval of the Share Amount Amendment requires the affirmative vote of the
holders of at least a majority of the shares of CVDI Common Stock cast at the
Meeting. In accordance with the North Carolina law, abstentions and broker
non-votes will not be deemed to have been cast either "for" or "against" the
Share Amount Amendment.
EFFECTS OF THE REORGANIZATION
In the Reorganization, the Company will merge with a wholly owned
subsidiary of Holding Company, Merger Sub, with the Company as the surviving
corporation in the merger. The separate corporate existence of Merger Sub will
terminate. As a result of the Reorganization, the Company will become wholly
owned by Holding Company and the Company's shareholders who do not perfect
their dissenters' rights will become entitled to receive Holding Company Common
Stock in exchange for their CVDI Common Stock, share for share.
The Reorganization will not affect the relative voting rights or ownership
interests of shareholders, except to the extent shareholders perfect their
dissenters' rights. The executive officers and directors of Holding Company
immediately following the Reorganization will be the same executive officers
and directors of the Company as of immediately prior to the Reorganization.
REASONS FOR THE REORGANIZATION
The Company's Board of Directors has unanimously approved the Merger
Agreement and the related transactions because it believes that they will
provide organizational flexibility helpful in fostering the development of the
business activities in which it is currently engaged and any in which it may
engage in the future. In particular, the Company desires to operate its
business under a new name, PharmaNetics, Inc., principally because it believes
the new name more accurately reflects the scope of the Company's business,
which now extends and is anticipated to continue to extend beyond the field of
cardiovascular diagnostics. The holding company structure contemplated by the
Reorganization will permit the Company to operate under the new name without
having to obtain consents or make filings under certain of its contracts or FDA
and other regulations. The Company also believes that the use of a holding
company will permit any business acquired in the future by Holding Company to
retain its operating identity if that appears desirable and may contribute to
improved management performance by giving the managers of each operating
subsidiary a greater sense of identity and autonomy and a greater feeling of
individual responsibility for their business decisions. In addition, there may
be circumstances in which it will be advisable to insulate an acquired business
from potential liability of other operating subsidiaries, if any, of Holding
Company. Neither Holding Company nor the Company has any current plans to
engage in any business other than those in which the Company is currently
engaged, but management intends to evaluate opportunities to diversify when
they arise. Neither Holding Company nor the Company currently has any agreement
or understanding with respect to any future acquisitions.
SHARE EXCHANGE
In the Reorganization, each share of CVDI Common Stock outstanding
immediately prior to the Reorganization, excluding shares held by dissenting
shareholders ("DISSENTING SHARES") who have perfected their dissenters' rights
under Article 13 of the North Carolina Business Corporation Act ("DISSENTING
SHAREHOLDERS"), will be converted into the right to receive one share of
Holding Company Common Stock. The shares of Holding Company Common Stock (the
"REORGANIZATION SHARES") to be issued to CVDI shareholders other than any
Dissenting Shareholders (the "EXCHANGING SHAREHOLDERS") will represent 100% of
Holding Company's issued and outstanding shares of capital stock immediately
after the Reorganization. See "Proposal No. 1 -- Approval of the Reorganization
- -- Share Exchange."
RELATED EVENTS; HOLDING COMPANY CHARTER DOCUMENTS
The Merger should be considered in the context of certain related events.
See "Proposal No. 1 -- Approval of the Reorganization -- Related Events."
Approval of the Reorganization will constitute approval of the Articles of
Incorporation and Bylaws of Holding Company, which, except as described herein,
are substantially similar to those of the Company. See "Proposal No. 1 --
Approval of the Reorganization -- Charter Documents."
3
<PAGE>
RIGHTS OF DISSENTING SHAREHOLDERS
Pursuant to Article 13 of the North Carolina Business Corporation Act, any
shareholder who does not vote in favor of the Reorganization and who, at or
prior to the Meeting, gives the Company a signed written notice of his or her
objection to the Reorganization and intent to demand payment for his or her
shares, may demand payment for his or her shares in an amount equal to the
"fair value" of such shares (as determined by the Company and the Dissenting
Shareholder or, alternatively, by court appraisal) in lieu of Reorganization
Shares pursuant to the Merger Agreement. See "Dissenters' Rights of CVDI
Shareholders."
FEDERAL INCOME TAX CONSEQUENCES OF THE REORGANIZATION
Upon consummation of the Reorganization, all outstanding shares of CVDI
Common Stock held by the Exchanging Shareholders at the Effective Time will be
converted into the right to receive the Reorganization Shares. The Company has
received a written opinion of its legal counsel, Wyrick Robbins Yates & Ponton
LLP, that, for federal income tax purposes, the Reorganization will be tax-free
to CVDI, Holding Company, Merger Sub and the Exchanging Shareholders. A copy of
that opinion has been filed as an exhibit to the Registration Statement of
which this Proxy Statement/Prospectus is a part. See "Proposal No. 1 --
Approval of the Reorganization -- Federal Income Tax Consequences of the
Reorganization."
CONDITIONS AND TERMINATION
The consummation of the Reorganization is subject to a number of
conditions, including the approval of the Reorganization by the shareholders of
CVDI. To the extent permitted by law, any of the conditions to closing may be
waived by CVDI, Holding Company or Merger Sub. In addition, notwithstanding the
prior approval of the Reorganization by CVDI shareholders, the Reorganization
may be abandoned and the Merger Agreement terminated in certain circumstances.
See "Proposal No. 1 -- Approval of the Reorganization -- Conditions to the
Merger; Termination."
BUSINESS OF CVDI, HOLDING COMPANY AND MERGER SUB
CVDI develops, manufactures and markets a proprietary cardiovascular
diagnostic analyzer and tests that provide, at the point of patient care, rapid
and accurate evaluation of hemostasis and certain new drugs under development.
In August 1998, CVDI and Chiron Diagnostics Corporation signed a five-year
global distribution agreement for certain CVDI diagnostic coagulation tests.
See "Information Relating to CVDI -- Business of CVDI." Merger Sub is a North
Carolina corporation wholly owned by Holding Company. Merger Sub has no present
operations of its own. Holding Company, a North Carolina corporation, is a
company which has no present operations of its own and was recently formed (and
is currently owned) by CVDI for the purpose of establishing a holding company
for CVDI. See "Information Relating to Merger Sub" and "Information Relating to
Holding Company."
EXPENSES OF THE REORGANIZATION
The expenses of the Reorganization and the transactions contemplated
thereby, estimated to be approximately $100,000, will be borne by CVDI
regardless of whether the Reorganization is consummated.
4
<PAGE>
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE COMPANY'S
FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED ELSEWHERE IN THIS PROXY
STATEMENT/PROSPECTUS. THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS WHICH
INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULT MAY DIFFER
MATERIALLY FROM THOSE DISCUSSED IN THE FORWARD-LOOKING STATEMENTS AS A RESULT
OF VARIOUS FACTORS, INCLUDING THE MATTERS SET FORTH IN THIS PROXY
STATEMENT/PROSPECTUS.
PROPOSAL NO. 1 -- APPROVAL OF THE REORGANIZATION
GENERAL
CVDI, Merger Sub and Holding Company have entered into the Merger
Agreement which provides for the merger of Merger Sub with and into CVDI. A
copy of the Merger Agreement accompanies this Proxy Statement as APPENDIX A.
This Proxy Statement contains summaries of the material provisions contained in
the Merger Agreement and other Appendices. All references to and summaries of
the Appendices to this Proxy Statement are qualified in their entirety by
reference to the full text of the respective Appendix. CAPITALIZED TERMS NOT
SEPARATELY DEFINED HEREIN HAVE THE SAME MEANINGS GIVEN THEM IN THE MERGER
AGREEMENT.
EFFECTS OF THE REORGANIZATION
The Reorganization is expected to be effected as soon as possible after
the Meeting. At the Effective Time, Merger Sub will be merged with and into
CVDI. Each share of Merger Sub common stock outstanding at the Effective Time
will be converted into one share of CVDI Common Stock, and CVDI will become a
wholly owned subsidiary of Holding Company. CVDI will be the surviving
corporation (the "Surviving Corporation"), and the separate corporate existence
of Merger Sub will terminate. CVDI's identity, existence, powers, assets,
rights and immunities will remain unaffected by the Reorganization, and the
powers, assets, rights and immunities of Merger Sub will be merged into CVDI.
The Reorganization should NOT result in any change in the business,
management, fiscal year, assets, liabilities or location of the principal
facilities of the Company. The directors of CVDI prior to the Reorganization
will continue as the directors of Holding Company. All CVDI stock plans will be
continued by Holding Company, and each outstanding option or right to purchase
shares of CVDI Common Stock will automatically be converted into an option or
right to purchase that same number of shares of Holding Company Common Stock
upon the same terms and subject to the same conditions. Shareholders should
also note that approval of the Reorganization will also constitute approval of
the assumption of all CVDI stock plans by Holding Company. CVDI's other
employee benefit arrangements will continue to be maintained by CVDI, upon the
terms, and subject to the conditions, currently in effect.
Indebtedness of CVDI convertible into the CVDI Common Stock shall
automatically become convertible into PharmaNetics Common Stock on the same
terms and conditions under which such indebtedness was convertible immediately
prior to the Reorganization.
MERGER SHARE EXCHANGE
At the Effective Time, each outstanding share of CVDI Common Stock held by
the Exchanging Shareholders immediately prior thereto will be converted into
the right to receive one share of Holding Company Common Stock. The
Reorganization Shares will represent 100% of Holding Company's issued and
outstanding shares at the Effective Time.
EXCHANGE METHOD
Promptly following the Effective Time, the Company will cause its exchange
agent (the "Exchange Agent") to mail letters of transmittal to each holder of
record of a certificate that immediately prior to the Effective Time
represented issued and outstanding shares of CVDI Common Stock, accompanied by
instructions for use in effecting the surrender of the certificates or
instruments in exchange for Reorganization Shares. Similar documentation will
be delivered by the Company to each holder of record of options to purchase
Common Stock of the Company. After receipt of such transmittal form, each of
such holders may, at such holder's option, surrender their certificates or
instruments, together with a duly completed and executed transmittal form, to
the Exchange Agent, as indicated on the transmittal form, and each such holder
will receive in exchange therefor a certificate or instrument representing an
identical number of Reorganization Shares or the right to purchase an identical
number of Reorganization Shares, as the case may be.
It is not necessary for shareholders or optionees of the Company to
exchange their existing stock certificates or instruments for certificates or
instruments of Holding Company. Until so surrendered and exchanged, each
certificate or instrument evidencing CVDI Common Stock or options to purchase
CVDI Common Stock will be deemed for all purposes to
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evidence the identical number of Reorganization Shares or replacement options
to purchase Holding Company Common Stock, as the case may be.
It is expected that at the Effective Date, Holding Company Common Stock
will be listed on the Nasdaq National Market under the trading symbol "PHAR".
OPERATION AND MANAGEMENT OF HOLDING COMPANY AND CVDI AFTER THE REORGANIZATION
The Board of Directors of Holding Company immediately following the Merger
will be the existing Board of Directors of CVDI, namely John P. Funkhouser,
William A. Hawkins, John K. Pirotte, Stephen R. Puckett and Philip R. Tracy.
The executive officers of CVDI and of Holding Company immediately following the
Merger will be the current executive officers of CVDI, namely: John P.
Funkhouser, President and Chief Executive Officer; Paul T. Storey, Treasurer,
Secretary and Director of Finance; Dick D. Timmons, II, Vice President and
Chief Operating Officer; Donald E. Mahan, Ph.D., Vice President of Research and
Development; Michael D. Riddle, Vice President of Sales and Marketing; and
Peter J. Scott, Vice President of Quality Assurance and Regulatory Affairs. The
Board of Directors of CVDI immediately following the Reorganization will
consist of John P. Funkhouser.
CVDI BOARD APPROVAL OF AND REASONS FOR THE REORGANIZATION
In July 1998, CVDI's directors examined the terms of the proposed
Reorganization. CVDI's Board of Directors, by unanimous vote of all members,
concluded that the terms of the proposed Reorganization were fair to and in the
best interests of the CVDI shareholders, approved the proposed Reorganization,
and recommended that the CVDI shareholders vote in favor of the Merger
Agreement and the Reorganization.
The Board of Directors of CVDI based its approval and recommendation of
the Reorganization on a number of factors, including its knowledge of the
business, operations, financial needs, financial alternatives and prospects of
CVDI and its belief that the Reorganization and the formation of the holding
company which will result from the Reorganization's consummation are in the
best interests of CVDI and the CVDI shareholders. The Reorganization will
afford to CVDI the advantages of having a related holding company while
preserving its independence and flexibility. Creation of a holding company will
permit the adoption of an organizational structure with businesses operating as
separate subsidiaries. The Board of Directors believes that such
diversification is necessary because of the growing challenges faced by and the
increasing competition within the pharmaceutical industry. In particular, the
Company desires to operate its business under a new name, PharmaNetics, Inc.,
principally because it believes the new name more accurately reflects the scope
of the Company's business, which now extends and is anticipated to continue to
extend beyond the field of cardiovascular diagnostics. The holding company
structure contemplated by the Reorganization will permit the Company to operate
under the new name without having to obtain consents or make filings under
certain of its contracts or FDA and other regulations. In light of the wide
variety of factors considered in reaching its recommendation, CVDI's Board of
Directors did not find it practicable to assign any relative weight to the
factors it considered.
The Boards of Directors of Holding Company and Merger Sub have unanimously
approved the Reorganization. As the sole shareholder of Merger Sub, Holding
Company has approved the Reorganization, and, as the sole shareholder of
Holding Company, CVDI has also approved the Reorganization.
RECOMMENDATION
CVDI's Board of Directors believes that the proposed Reorganization and
related transactions are fair to and in the best interests of CVDI and its
shareholders and recommends a vote FOR approval of the Reorganization.
VOTE REQUIRED
Pursuant to the terms of the Merger Agreement and the provisions of the
North Carolina Business Corporation Act, approval of the Reorganization and the
Merger Agreement requires the affirmative vote of the holders of at least a
majority of all of the shares of CVDI Common Stock outstanding on the Record
Date.
In accordance with North Carolina law, CVDI intends to count shares of
CVDI Common Stock present in person at the Meeting but not voting, and shares
of CVDI Common Stock for which it has received proxies but with respect to
which holders of such shares have abstained, as present at the Meeting for
purposes of determining the presence or absence of a quorum for the transaction
of business. In addition, brokers who hold shares of CVDI Common Stock in
"street" name for customers who are the beneficial owners of such shares are
prohibited from giving a proxy to vote shares held for such customers with
respect to the Merger Agreement without specific instructions from such
customers. Shares of CVDI Common
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Stock represented by proxies returned by a broker holding such shares in
nominee or "street" name will be counted for purposes of determining whether a
quorum exists, even if such shares are not voted in matters where discretionary
voting by the broker is not allowed ("broker non-votes"). Abstentions from
voting and broker non-votes will not be deemed to have been cast either "for"
or "against" the Share Amount Amendment at the Meeting.
Approval by the shareholders of the proposed Reorganization will
constitute approval of the Merger Agreement (including approval of the persons
to become directors of Holding Company described under "Management"). Copies of
the Merger Agreement, the Articles of Incorporation and the Bylaws of Holding
Company are attached hereto as Appendices A, B and C, respectively.
CHARTER DOCUMENTS
Except as described below, the provisions of the Articles of Incorporation
and Bylaws of Holding Company are substantially similar to those of the CVDI
Articles of Incorporation and Bylaws.
Holding Company's Bylaws provide that a director may not be removed by the
shareholders at a meeting unless the notice of the meeting states the purpose,
or one of the purposes, of the meeting, is removal of the director. CVDI's
Bylaws contain no such limitation.
Holding Company's Bylaws require that shareholders intending to submit
proposals for consideration at a meeting comply with a number of requirements
as a condition to becoming entitled to present any business at a shareholder
meeting, including, without limitation, that the shareholder provide notice to
Holding Company not more than 90 and not less than 50 days before the meeting
in writing of the business to be presented and provide certain information
about the shareholder and the proposal. CVDI's Bylaws contain no such
conditions.
CVDI's Bylaws require that notice of shareholder meetings be given not
more than 50 days before the meeting. Holding Company's Bylaws, consistent with
the North Carolina Business Corporation Act (the "BCA"), require that such
notice be given not more than 60 days before the meeting.
CVDI's Bylaws require only that the Board of Directors consist of at least
one director. Holding Company's Bylaws provide that the number of authorized
directors shall be not more than nine but not less than one director, and may
be fixed or changed, within this minimum or maximum, by the shareholders or the
Board of Directors.
CVDI's Bylaws provide that the record date for a shareholder meeting may
not be more than 50 days before the date on which the particular actions are to
be taken, while the Bylaws of Holding Company, consistent with the BCA, require
only that the record date not be more than 70 days before the date on which the
particular actions are to be taken.
RELATED EVENTS
The Reorganization should be considered in the context of certain related
events contemplated by the Merger Agreement. The following is a summary of such
transactions.
1. CONVERTIBLE DEBT. Holding Company will assume all obligations of CVDI
with respect to all of CVDI's outstanding convertible debt and will provide for
the substitution of shares of Holding Company Common Stock for and in the stead
of the shares of CVDI Common Stock held for issuance upon conversion of such
indebtedness.
2. STOCK OPTIONS. Holding Company will assume all obligations of CVDI with
respect to all of CVDI's outstanding stock option plans and stock options as
provided for in the Merger Agreement and will provide for the substitution of
shares of Holding Company Common Stock for and in the stead of the shares of
CVDI Common Stock held for issuance upon exercise of such outstanding stock
options.
CONDITIONS TO THE REORGANIZATION; TERMINATION
Pursuant to the terms of the Merger Agreement and the provisions of the
North Carolina Business Corporation Act, approval of the Reorganization
requires the affirmative vote of the holders of at least a majority of all of
the shares of CVDI Common Stock outstanding on the Record Date.
Notwithstanding prior approval by the CVDI shareholders, the Merger
Agreement may be terminated and the Reorganization abandoned at any time prior
to its consummation by action of the board of directors of either Holding
Company or CVDI. For example, the Board of Directors of CVDI may decide to
abandon the Reorganization if a significant number of shareholders dissent from
the Reorganization and demand payment for their shares.
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AMENDMENTS AND WAIVERS
The Merger Agreement may be amended or modified and any provisions or
conditions contained therein (including those which otherwise would be cause
for the abandonment of the Reorganization) may be waived either before or after
the Meeting upon the mutual agreement in writing of CVDI and Holding Company,
but no amendment effected after the Meeting may affect the amount or type of
consideration to be delivered to the Exchanging Shareholders for their CVDI
Common Stock.
EFFECTIVE TIME
The Merger Agreement provides that, subject to approval and adoption by
the shareholders of the Company, the Effective Time shall be the date on which
articles of merger relating to the Reorganization are filed with the North
Carolina Secretary of State. The Company anticipates that such articles will be
filed on the date of the Meeting or as soon thereafter as practicable.
EXPENSES OF THE REORGANIZATION
The expenses of the Reorganization and the transactions contemplated
thereby, estimated to be approximately $100,000, will be borne by CVDI
regardless of whether the Reorganization is consummated. CVDI has retained
Corporate Investor Communications, Inc. at an estimated cost of $5,000, plus
reimbursement of expenses, to assist CVDI in the solicitation of proxies from
brokerage firms and other custodians, nominees and fiduciaries.
FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
The Company has received an opinion of its legal counsel, Wyrick Robbins
Yates & Ponton LLP (the "Tax Opinion"), with respect to the material U.S.
federal income tax consequences of the Reorganization to the holders of CVDI
Common Stock, CVDI, Holding Company and Merger Sub. A copy of the Tax Opinion
has been filed as an exhibit to the Registration Statement of which this Proxy
Statement/Prospectus forms a part. The following is an accurate summary of the
material federal income tax consequences of the proposed Reorganization.
However, neither Holding Company nor CVDI has requested or obtained a ruling
from the Internal Revenue Service (the "IRS"). Further, the statements
contained herein and in the Tax Opinion are not binding on either the IRS or
the courts. Consequently, there can be no assurance that the IRS would classify
the Reorganization as a reorganization qualifying under Code Section 368 or an
exchange qualifying under Code Section 351. Neither the federal income tax
discussion set forth below nor the Tax Opinion deals with all aspects or
details of federal taxation that may be relevant to CVDI shareholders or CVDI.
All CVDI shareholders are urged to consult their own tax advisors as to the tax
consequences to them of the Reorganization, including the applicability and
effect of federal, state, local, foreign and other tax laws.
SUMMARY OF THE TAX OPINION. The Tax Opinion states that the following tax
consequences will generally result to the Exchanging Shareholders:
1. No gain or loss will be recognized by Exchanging Shareholders as a
result of their exchange of shares of CVDI Common Stock for Reorganization
Shares in the Reorganization;
2. An Exchanging Shareholder's income tax basis in the Reorganization
Shares received in the Reorganization will be the same as the basis such
shareholder had in the CVDI Common Stock surrendered in exchange therefor; and
3. The holding period for the Reorganization Shares received by each
Exchanging Shareholder will include the holding period of the shares of CVDI
Common Stock surrendered in exchange therefor, provided that the shares of CVDI
Common Stock are held as a capital asset by such holder at the effective time
of the Merger.
4. Under Code Section 351, CVDI and Holding Company will not recognize any
gain or loss as a result of the Reorganization.
5. A Dissenting Shareholder receiving solely cash in exchange for CVDI
Common Stock by exercising dissenter's rights shall be treated as having
received a distribution in redemption of such shareholder's stock subject to
the provisions and limitations of Section 302 of the Code. If, after the
Merger, the Dissenting Shareholder neither directly owns nor is considered to
own, under the constructive ownership rules of Section 318(a) of the Code, any
Holding Company stock, the redemption will result in a capital gain or loss to
such Dissenting Shareholder, pursuant to Revenue Ruling 74-515, 1974-2 C.B.
118, and Section 302(b) of the Code.
A more detailed discussion of the federal income tax consequences and the
bases for the Tax Opinion follows.
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The Tax Opinion assumes that the payments to Dissenting Shareholders, if
any, plus expenses incurred by CVDI in connection with the Merger, will not
exceed ten percent (10%) of the net assets of CVDI before the Merger.
THE MERGER AS A TAX-FREE REORGANIZATION. Pursuant to the Merger Agreement,
Merger Sub will merge with and into CVDI with CVDI as the Surviving
Corporation. Each Exchanging Shareholder will surrender all of his, her or its
shares of CVDI Common Stock to Holding Company, and such shares will be
exchanged for and converted solely into the right to receive Reorganization
Shares. The Reorganization is structured as a reverse triangular (subsidiary)
merger. The Tax Opinion states that the Reorganization will, under current law,
qualify as a "reorganization" for federal income tax purposes within the
meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended (the
"CODE"), pursuant to Sections 368(a)(l)(A) and 368(a)(2)(E). As noted in the
Tax Opinion, CVDI, Holding Company and Merger Sub each will be "a party to a
reorganization" (within the meaning of Section 368(b) of the Code) with respect
to the Reorganization, and no gain or loss will be recognized by CVDI, Holding
Company or Merger Sub as a result of the Merger, pursuant to Sections 361 and
357(a) of the Code. In addition, the Reorganization will also qualify as a
tax-free exchange under Code Section 351. See "The Merger as a Tax-Free
Exchange" below.
Code Section 368(a)(2)(E) requires that former shareholders of the
Surviving Corporation (CVDI) must have exchanged, for an amount of voting stock
of the controlling corporation (Holding Company), an amount of stock in the
surviving corporation which constitutes "control" of such corporation.
"Control" for such purposes means stock possessing at least 80% of the
corporation's total combined voting power and at least 80% of the total number
of shares of each class of nonvoting stock. The effect of the foregoing
requirement is to limit the amount of property other than voting stock of the
controlling corporation issued in a qualifying tax-free reverse triangular
merger to no more than 20% of the total consideration "paid" by the controlling
corporation (Holding Company). Therefore, if it is determined that the value of
any total consideration deemed to constitute property other than voting stock
of the controlling corporation exceeds 20% of the total consideration delivered
by Holding Company to holders of the CVDI stock, then the Reorganization would
not qualify as a tax-free reorganization under Code Sections 368(a)(l)(A) and
368(a)(2)(E).
CVDI believes that the value of any consideration deemed to qualify as
property other than voting stock of the controlling corporation is less than
20% of the total consideration to be delivered by Holding Company to the
holders of CVDI stock, and that, therefore, the Reorganization will be treated
as a tax-free reverse triangular merger under Code Sections 368(a)(l)(A) and
368(a)(2)(E). This belief is based upon an analysis of (i) the amount (and fair
market value) of the Reorganization Shares, and (ii) the absence of any other
property (other than payments to Dissenting Shareholders) to be delivered to
CVDI shareholders in connection with the Reorganization. If, however, a
sufficient number of CVDI shareholders were to exercise dissenters' rights so
that more than 20% of the total consideration paid to CVDI shareholders is paid
in cash to Dissenting Shareholders, the Reorganization would not qualify as a
tax-free reverse triangular merger. Such a circumstance, though, would not
adversely affect the Reorganization's ability to qualify as a tax-tree exchange
under Code Section 351. See "The Merger as a Tax-Free Exchange" below.
In addition to the requirement that 80% of the control of an acquired
corporation be obtained for voting stock of the controlling corporation (i.e.,
Holding Company), Code Section 368 and the regulations promulgated thereunder
impose other requirements before a transaction can be characterized as a
tax-free reorganization. In particular, for a reverse triangular merger to be a
tax-free reorganization as described in Section 368(a)(2)(E) of the Code, it is
necessary that following the merger (i) either the historic business of the
acquired corporation be continued or a significant portion of the acquired
corporation's historic business assets be used in a business; (ii) the
shareholders of the acquired corporation receive in the merger, in exchange for
a substantial part of the value of the proprietary interest of the acquired
corporation, a proprietary interest in the controlling corporation, and such
proprietary interest is not disposed of in connection with the merger to the
acquired corporation, the controlling corporation or any party related thereto;
and (iii) substantially all of the assets of the acquired corporation and the
controlling corporation be held by the surviving corporation following the
merger (for this purpose, any shares of Holding Company transferred to Merger
Sub in pursuance of the Reorganization are disregarded). In addition, case law
requires that a transaction have a business purpose to qualify as a tax-free
reorganization. Because of the inherently factual nature of these requirements
and the fact that their satisfaction may depend in part on events to occur
following the Reorganization, no assurances can be given (absent obtaining a
private letter ruling from the Internal Revenue Service, which neither CVDI nor
Holding Company intends to seek) that the Reorganization will qualify as a
"tax-free" reorganization described in Section 368 of the Code. Each holder
should, therefore, consult his or her own tax advisor as to the tax-free nature
of the Reorganization and the possibility that the exchange of shares will be
taxable to such holder.
THE REORGANIZATION AS A TAX-FREE EXCHANGE. Although in form the
Reorganization has been structured as a reverse triangular merger, the Tax
Opinion states that the Reorganization will also qualify as a tax-free exchange
under Code Section 351 by the Exchanging Shareholders to Holding Company.
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Code Section 351 provides that no gain or loss will be recognized by a
taxpayer who transfers property to a corporation solely in exchange for stock
in such corporation if such taxpayer alone or together with other persons
making similar transfers controls the corporation immediately after the
exchange. "Control" under Code Section 351 has the same meaning as for purposes
of Code Section 368 and is discussed above. If a transferor/shareholder
receives money or other property (including securities) other than stock of the
transferee corporation, any gain from the transfer (but not any loss) will be
recognized to the extent of the money received or the fair market value of the
other property received.
FEDERAL TAX REPORTING POSITION. Holding Company and CVDI intend to report
the Reorganization as a tax-free reorganization within the meaning of Code
Sections 368(a)(1)(A) and 368(a)(2)(E). In the event that classification of the
Reorganization is successfully challenged by the Internal Revenue Service,
Holding Company and CVDI intend to take the position and assert that the
Reorganization is a tax-free exchange within the meaning of Code Section 351.
In general, the fact that a transaction may qualify as both a tax-free
reorganization under Section 368(a) and a tax-free exchange under Section 351
is of little significance since in both instances non-recognition treatment is
accorded to the transferor. However, it should be noted that different tax
consequences can result from the characterization as a tax-free exchange or
reorganization, including, under a tax-free reorganization, the permitted
carry-over of certain tax attributes under Code Section 381.
TAXABLE TRANSACTIONS. As noted in the Tax Opinion, a successful challenge
by the IRS to the tax-free status of the Reorganization (both as a
reorganization pursuant to Code Section 368 and as a tax-free exchange pursuant
to Code Section 351, as discussed above) would result in a recharacterization
of the transaction by the IRS as a taxable sale by Exchanging Shareholders of
their CVDI Common Stock in exchange for the Reorganization Shares. In this
event, an Exchanging Shareholder would recognize gain or loss with respect to
each share of CVDI Common Stock exchanged in the Reorganization equal to the
difference between the fair market value, at the Effective Time, of the total
consideration received for such share in the Reorganization (i.e., the
Reorganization Shares) and the shareholder's basis in the CVDI Common Stock so
exchanged. An Exchanging Shareholder's aggregate basis in the Reorganization
consideration so received would equal his or her fair market value at the time
of receipt, and the Exchanging Shareholder's holding period for such stock
would begin on the date of the consummation of the Reorganization.
Irrespective of the possible tax-free nature of the Reorganization, a
recipient of Reorganization Shares would recognize gain to the extent such
shares are considered to be received in exchange for services or property
(rather than solely in exchange for CVDI Common Stock). All or a portion of
such gain may be taxable as ordinary income.
RECEIPT OF CASH BY DISSENTING SHAREHOLDERS. As noted in the Tax Opinion,
in the event that a Dissenting Shareholder were to receive cash for the fair
value of shares, such Dissenting Shareholder may be treated as having received
such payment in redemption of shares. Such a redemption would be subject to the
conditions and limitations of Section 302 of the Code. If the Dissenting
Shareholder owns, either actually or constructively under the provisions of
Section 318 of the Code, any shares after the Effective Time, the payment made
to the Dissenting Shareholder could be treated as a dividend and recognized as
ordinary income. In general, under Section 318 of the Code, a shareholder may
be considered to own stock that is owned, and in some cases constructively
owned, by certain related individuals or entities, and stock that the
shareholder, or related individuals or entities, have the right to acquire by
exercising an option or converting a convertible security. Each shareholder who
contemplates exercising dissenters' rights should consult his or her own tax
advisor as to the taxation of any gain or loss and the possibility that any
payment to him, her or it will be treated as a dividend.
ACCOUNTING TREATMENT OF THE REORGANIZATION
There will be no accounting effect or change in the carrying amount of the
assets and liabilities of CVDI as a result of the merger of Merger Sub into
CVDI. The consolidated capitalization, assets, liabilities, and financial
statements of Holding Company and CVDI immediately following the Reorganization
will be the same as those of CVDI immediately prior to the Reorganization.
RESTRICTIONS ON RESALE OF HOLDING COMPANY COMMON STOCK
The shares of Holding Company Common Stock to be issued pursuant to the
Merger Agreement have been registered under the Securities Act. Persons who are
not affiliates of CVDI and who will not be affiliates of Holding Company
following the Effective Time may resell their shares of Holding Company Common
Stock without restriction. Under present law, any public reoffering or sale of
such shares by any person who is an "affiliate" of CVDI at the time the Merger
Agreement is submitted to a vote of CVDI's shareholders will require either (i)
the further registration of such shares under the Securities Act, (ii)
compliance with Rule 145 promulgated under the Securities Act, which permits
sales under certain conditions, as discussed below, or (iii) the availability
of another exemption from such further registration. In general, under
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Rule 145, assuming that such a person is, at the time of sale, an affiliate of
Holding Company, such a person may publicly sell such stock if the person: (1)
sells during any three-month period no more than the number of shares permitted
under Rule 144(e) (which is generally the greater of (i) 1% of the total number
of shares of Holding Company Common Stock outstanding, or (ii) the average
weekly volume of trading of Holding Company Common Stock for the four calendar
weeks prior to the sale); (2) sells in a "brokers' transaction" (which means,
generally, that the broker can do no more than execute the order as agent for
the seller, can receive no more than the usual broker's commission, cannot
solicit orders to buy in connection with the transaction, and cannot believe
that the seller is an underwriter of the securities being sold); (3) does not
solicit orders to buy in connection with the transaction and does not make any
payment in connection with such sale to anyone other than the selling broker;
and (4) sells at a time when there is adequate current public information about
Holding Company (which will be satisfied so long as Holding Company's Common
Stock remains registered under the Exchange Act and Holding Company continues
to file the necessary reports under such act). If a person who was an affiliate
of CVDI at the Meeting is not an affiliate of the Holding Company at the time
of resale, he or she can also resell without subsequent registration if he or
she (a) holds the shares for at least one year and sells at a time where there
is adequate public information about Holding Company (as in (4) above); or (b)
holds the shares for at least two years.
DISSENTERS' RIGHTS OF CVDI SHAREHOLDERS
Under Article 13 of the North Carolina Business Corporation Act ("Article
13"), any shareholder of the Company who does not vote in favor of the
Reorganization and who, at or prior to the Meeting, gives to the Company
written notice of his or her objection to the Reorganization and intent to
demand payment for his or her shares, may demand payment for such shares in an
amount equal to the "fair value" of such shares prior to the mailing hereof, as
determined by the Company and the Dissenting Shareholder or, alternatively, by
court appraisal.
The following is a brief summary of the statutory procedures required to
be followed by Dissenting Shareholders in order to perfect their rights to seek
relief under Article 13. The text of Article 13 accompanies this Proxy
Statement as Appendix D. Although the material provisions of Article 13 set
forth in this Proxy Statement have been summarized accurately, the statements
made herein concerning such statute are not necessarily complete, and reference
is made to the full text of Article 13 attached hereto as Appendix D. Each such
statement is qualified in its entirety by such reference. Any shareholder who
may be contemplating the exercise of statutory dissenters' rights should
consult his or her legal and financial advisors and should review Article 13
carefully, because a failure to comply with any of the statutory requirements
precisely may result in a loss of such rights.
If any shareholder elects to dissent from the Reorganization and to seek
an independent determination of the fair value of his or her shares under
Article 13, each of the following conditions must be satisfied.
1. The Dissenting Shareholder must deliver (and the Company must receive),
prior to the taking of the vote on the Reorganization, written notice of his or
her intent to demand payment for his or her shares. Such written notice must
reasonably inform the Company of the identity of the Dissenting Shareholder and
of the fact that the Dissenting Shareholder intends to demand payment for his
or her shares. Such written notice should be delivered to Cardiovascular
Diagnostics, Inc., 5301 Departure Drive, Raleigh, North Carolina 27616,
Attention: Paul T. Storey, Secretary of the Company. If mailed, it is
recommended that such written objection be sent by registered or certified
mail, return receipt requested. The return of a proxy with an instruction to
vote the shares represented thereby against approval of the Reorganization or
to abstain will not, by itself, satisfy the requirement that a written
objection to the Reorganization be filed with the Company.
2. The Dissenting Shareholder's shares must not be voted in favor of the
Reorganization. This requirement will be satisfied if a proxy is signed and
returned with instructions to vote against the Reorganization or if no proxy is
returned, or if the Dissenting Shareholder attends the Meeting and votes
against the Reorganization or abstains from voting (and, in the case of
abstention, has revoked any proxy voting in favor of the Reorganization). If
the Dissenting Shareholder signs and returns a proxy in the form to be provided
with the Proxy Statement but does not indicate how the shares represented
thereby are to be voted, such shares will be voted in favor of the
Reorganization, and such Dissenting Shareholder's right to demand payment for
his or her shares will be lost unless such proxy is revoked prior to the voting
thereof. Attendance by the Dissenting Shareholder at the Meeting will not in
and of itself constitute revocation of a proxy.
3. If the Reorganization is approved, within 10 days after such approval,
the Dissenting Shareholder will be delivered a written dissenters' notice
accompanied by a copy of Article 13 and specifying: (i) where the Dissenting
Shareholder's payment demand must be sent and where and when certificates for
his or her shares must be deposited; (ii) a form of notice to be delivered to
the Company for demanding payment; and (iii) the date by which the Company must
receive the payment demand.
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4. A Dissenting Shareholder who receives a written dissenters' notice from
the Company must demand payment and deposit the certificates for his or her
shares in accordance with the terms of such notice. Failure to do so by the
date set forth in such notice will result in the Dissenting Shareholder's
forfeiture of the right to receive payment for his or her shares.
5. Upon receipt of a payment demand, the Company shall offer to pay to
each Dissenting Shareholder the Company's estimate of the amount equivalent to
the fair value of the shares, plus interest accrued to the date of payment, and
shall pay this amount to each Dissenting Shareholder who agrees to accept it in
full satisfaction of his or her demand. The Company's offer of payment must be
accompanied by its most recent financial statements, an explanation of how the
interest was calculated and a statement of the Dissenting Shareholder's right
to demand payment of his or her own estimate of the fair value of his or her
shares.
6. If the offer of payment made by the Company is unacceptable to the
Dissenting Shareholder, the Dissenting Shareholder may give the Company written
notice of his or her own estimate of the fair value of the shares and the
amount of interest due and demand payment of his or her estimate or reject the
Company's offer of payment and demand payment of the fair value of the shares
and interest due. Such final demand for payment must be received by the Company
within 30 days of his or her receipt of the Company's offer of payment. A
Dissenting Shareholder who fails to make a timely demand for final payment
shall be deemed to have withdrawn his or her dissent and demand for payment.
7. If the Dissenting Shareholder's final payment demand is not paid by the
Company, the Dissenting Shareholder will have three options: (i) he or she can
commence a judicial appraisal proceeding within 60 days after the date of his
or her payment demand; (ii) within 30 days after the expiration of the 60-day
period set forth in the preceding clause (i), he or she may accept, in writing,
the Company's offer of payment in full satisfaction of his or her demand; or
(iii) within the same 30-day period set forth in the preceding clause (ii), he
or she may withdraw his or her demand for payment and resume the status of a
nondissenting shareholder. Any such Dissenting Shareholder who fails to take
any of the aforementioned actions shall be deemed to have withdrawn his or her
dissent and demand for payment.
Costs of an appraisal proceeding, including the reasonable compensation
and expenses of appraisers appointed by the Court, shall be determined by the
Court and assessed upon the parties to the Court action, or any of them, in
such manner as the Court deems equitable under the circumstances.
INFORMATION RELATING TO MERGER SUB
Holding Company incorporated Merger Sub as its wholly owned subsidiary in
July 1998. Merger Sub conducts no business and has no assets, and exists for
the primary purpose of effectuating an acquisition. Merger Sub will be merged
with and into CVDI pursuant to the Merger Agreement. As a result of the
Reorganization, CVDI will become a wholly owned subsidiary of Holding Company,
and the separate corporate existence of Merger Sub will terminate. Merger Sub's
address and telephone number are the same as CVDI's address and telephone
number.
INFORMATION RELATING TO HOLDING COMPANY
Holding Company, a North Carolina corporation, was incorporated by CVDI in
July 1998. Holding Company currently conducts no business and has virtually no
assets, and exists solely for the purpose of forming a holding company for
CVDI. After the Reorganization, CVDI will be a wholly owned subsidiary of
Holding Company, and Holding Company will have no assets (other than the stock
of CVDI), no liabilities and no operations independent of those of CVDI. Thus,
financial statements of Holding Company following the Reorganization will be
virtually identical to those of CVDI prior to the Reorganization. Accordingly,
historical financial statements of Holding Company and pro forma financial
statements reflecting completion of the Reorganization have not been included
in this Proxy Statement. Holding Company's address and telephone number are the
same as CVDI's address and telephone number.
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INFORMATION RELATING TO CVDI
BUSINESS OF CVDI
CVDI develops, manufactures and markets a proprietary cardiovascular
diagnostic analyzer and tests that provide, at the point of patient care, rapid
and accurate evaluation of hemostasis and certain new drugs under development.
The Company believes that its Thrombolytic Assessment System ("TAS") is the
only stat, or "as soon as possible", point-of-care system capable of monitoring
both the coagulation (formation) and lysis (dissolution) of blood clots. Such
monitoring provides information which is critical in administering
anticoagulant and thrombolytic (clot-dissolving) drugs, which are used in the
treatment of heart attacks and strokes and in a variety of other medical
procedures. During 1997 the Company exhibited the flexibility of the TAS
platform by signing collaboration agreements with Knoll AG and Eli Lilly and
Company to monitor the effects of certain new drugs that are in clinical
trials.
Evaluation of hemostasis is an integral part of patient diagnosis and
treatment for a wide variety of medical conditions. Hemostatic test results
must be provided quickly because a majority of the drugs used to regulate
clotting are cleared rapidly from the body, and these drugs must be closely
monitored to maintain drug levels within an effective treatment range. The
Company believes that generally, hospital central and stat laboratories, which
currently provide the majority of such testing, cannot provide timely
information to clinicians regarding coagulation, and thrombolytic and other
drug monitoring. Any delay in providing such information can be a problem since
the physician is likely to leave the patient area during this time, which may
result in a further delay in diagnosis and treatment. The Company believes that
TAS can provide information regarding coagulation as well as thrombolytic and
other drug monitoring on a timely basis, thus permitting quicker diagnosis and
therapeutic intervention, which will improve hemostatic therapy and the quality
of patient care. The Company believes that this improvement may facilitate
quicker transfers out of expensive critical care settings, reduce the overall
length of hospital stays, reduce expenditures for laboratory equipment and its
associated maintenance and labor, and reduce the unnecessary use, and therefore
the overall cost, of pharmaceuticals. In addition, point-of-care testing can
save hospitals money by reducing the numerous steps, paperwork and personnel
involved in collecting, transporting, documenting and processing blood samples.
The Company currently sells its TAS analyzer and a menu of nine tests and
four sets of controls in the United States. Five of these tests, the
Prothrombin Time ("PT"), PT non-citrated ("PTNC"), the PT One, the activated
Partial Thromboplastin Time ("aPTT") and the Heparin Management ("HMT") tests
(which monitor oral anticoagulant therapy, low level intravenous anticoagulant
therapy and high level intravenous anticoagulant therapy, respectively), have
received Food and Drug Administration ("FDA") clearance under Section 510(k) of
the Food, Drug and Cosmetic Act (the "FDC Act"), and are currently sold for
commercial use. The other four tests, the SK Panel, Lysis Onset Time ("LOT"),
Low Range Heparin Monitoring ("LHMT") and Ecarin Clotting Time ("ECT") tests
(which monitor low heparin levels and antithrombin, respectively) are currently
sold in the U.S. "for investigational use only", pending further FDA review and
clearance. 510(k) filings were submitted for the LHMT and ECT tests in December
1997 and January 1998, respectively. The SK Panel, which consists of two tests,
assists physicians in anticipating possible complications of thrombolytic
therapy by screening patients for resistance to streptokinase. The LOT test may
be used during the administration of any thrombolytic drug to detect the
establishment of the lytic state, after which additional administration of the
drug may no longer be efficacious. The Company currently sells the TAS analyzer
and all of these tests in Europe.
On October 31, 1993, the Company acquired Coeur Laboratories, Inc.
("Coeur"), which manufactures and sells a line of disposable power injection
syringes used for cardiology and radiology procedures, as well as a line of
manifolds used in custom angiographic procedure kits. The Company acquired
Coeur in order to gain access to Coeur's management and infrastructure, its
cash flow and its manufacturing facility. Each year since the acquisition,
Coeur generated revenue of between $4.6 and $4.7 million, as well as positive
cash flow. The Company has used some of this cash to fund more rapid TAS
research and development than would have been possible otherwise. Additionally,
the Company believes that the ability to make immediate use of Coeur's existing
manufacturing facility and experienced management team enabled the Company to
develop its infrastructure more rapidly, thereby accelerating the
commercialization of TAS.
RECENT DEVELOPMENTS
In late August 1998, the Company and Chiron Diagnostics Corporation
("Chiron Diagnostics") signed a global distribution agreement for certain
Company diagnostic coagulation tests. At the same time, the Company sold
600,000 shares of its Common Stock of Chiron Diagnostics for $6,000,000, or $10
per share. In September 1998, Bayer Group agreed to acquire Chiron Diagnostics.
The Company believes Bayer's position as a global leader in diagnostics will
make it a good partner. See " -- Sales and Marketing" and "Certain
Transactions".
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INDUSTRY OVERVIEW
The practice of laboratory medicine has changed dramatically over the last
30 years, with new technology continuously evolving in response to the
physician's demand for information. This demand for information is particularly
acute in blood testing, where access to timely and accurate results is critical
to effective patient care. Initially, hospital blood analysis was performed in
multiple small laboratories that typically used time-consuming manual
techniques. The accuracy of tests performed under these conditions varied
considerably depending upon, among other factors, the skill of the laboratory
personnel. The advent of automated blood testing, first introduced in the
mid-1960's, allowed for centralization and standardization of laboratory tests.
With improved access to blood analysis, physicians began to use laboratory
tests as a primary diagnostic tool and consequently demanded more tests and
faster results. In an effort to meet this demand, some hospitals established
decentralized stat laboratories nearer the patient. These laboratories
typically rely on technology designed for efficiency in a high-volume
centralized department. The Company believes that reliance on this technology
makes stat laboratories inadequate and expensive, creating a need for new
technology suitable for use at the point of patient care.
Recent advances in technology allow many routine blood tests to be
performed at the point of patient care, where the physician can most
effectively use test results. Portable, easy-to-use analyzers designed to
perform blood analysis rapidly and accurately are emerging as a solution to
current healthcare demands. While speed is important in point-of-care testing,
accuracy is critical. Since point-of-care testing is typically performed by
operators who lack any special laboratory skills or training, the more
error-proof the testing system, from sample collection through archiving of the
test result, the more reliable the system will prove to be. By design, most
point-of-care tests require limited materials and minimum labor. Point-of-care
test systems must also comply with the Clinical Laboratory Improvement
Amendment of 1988 ("CLIA") regulations. See " -- Government Regulation --
CLIA".
Access to timely and accurate coagulation test results must be provided
quickly because a majority of the drugs used to regulate clotting are cleared
rapidly from the body and these drugs must be closely monitored to maintain
drug levels within a safe treatment range. Coagulation testing presents special
challenges in achieving test accuracy, because blood begins to coagulate as
soon as it leaves the body, and therefore any delay in performing a coagulation
test may lead to a less accurate test result. For this reason, coagulation
testing is an ideal area for point-of-care testing.
TECHNOLOGY
The Company's core technology relating to both the TAS analyzer and test
cards is currently protected by a number of U.S. and corresponding
international patents. The TAS card technology combines a mixture of dry
reagents and paramagnetic iron oxide particles ("PIOP") that is contained
within the card's reaction chamber. The test card has the approximate
dimensions and half the thickness of a standard credit card. Blood samples are
introduced into this reagent/particle mixture, dissolving the dry reagent and
freeing the magnetic particles to move within the card's chamber. When the
oscillating magnetic field is generated by the TAS analyzer, the magnetic
particles within the TAS card's reaction chamber move in response to the
magnetic field. An optical sensor within the TAS analyzer monitors the motion
of the magnetic particles without touching the blood sample. When movement
diminishes to a predetermined amplitude, the TAS system determines that a clot
has been formed.
Conversely, the same technology is used to measure the time required for a
clot to dissolve. The Company's technology permits the measurement of clot
dissolution by introducing a sample of blood to a mixture of magnetic particles
and reagents including a clot-forming chemical, thereby inducing a clot. The
system then measures the amount of time required for the induced clot to
dissolve. The Company believes that TAS is the only point-of-care system
capable of monitoring both coagulation and dissolution of clots. Furthermore,
an additional benefit to the Company is the flexibility of the TAS technology,
which allows for further expansion of the Company's menu of tests, since new
tests can be developed by using different reagents in the test cards.
PRODUCTS
THROMBOLYTIC ASSESSMENT SYSTEM (TAS)
The Company's Thrombolytic Assessment System, or TAS, consists of a
proprietary portable analyzer and proprietary, disposable test cards. The
Company's TAS analyzer and test cards are designed to work effectively in a
decentralized testing environment where they are used by healthcare personnel
who need not have received formal central laboratory training. The Company's
products are able to provide point-of-care testing, which can save valuable
time in obtaining test results, is more convenient to the healthcare
professional than laboratory testing and allows for more efficient treatment of
patients. The Company believes that TAS complies with current CLIA regulations.
See " -- Government Regulation -- CLIA".
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ANALYZER/SYSTEM OPERATION
The TAS analyzer weighs approximately four pounds and is about the size of
the typical office telephone. The TAS analyzer has a four-line LCD display
screen, which is driven by software to prompt the technician to input the user
and patient ID numbers, sample type, and timing of application of the blood
sample.
TAS can test unprocessed whole blood or plasma. Whole blood is obtained
through venipuncture by drawing blood from a patient, often into a tube
containing sodium citrate, which stabilizes the blood prior to testing. The
process of citrating blood requires no special training or skill, and can be
done at the point of patient care by the same person who performs the TAS test,
without adding any time to the process. Plasma, which is typically used in
laboratory testing, is whole blood which has had various cellular components
removed through spinning in a centrifuge for 10 to 15 minutes.
To operate TAS, a test card is swiped through the magnetic strip reader of
the analyzer, which automatically initiates quality controls and begins to
elicit information from the operator through a series of prompts outlining the
operating procedure for the specific test to be performed. The test card is
then inserted into the TAS analyzer. A single drop of unprocessed, noncitrated
or citrated, whole blood or plasma is then placed into the reaction chamber of
the card, which already contains the appropriate mixture of dry reagents and
PIOP for the test being performed. Typically within three minutes, the screen
on the TAS analyzer displays a numerical test result, which is comparable to
the result which would be achieved in a central laboratory using traditional
testing procedures. The portable analyzer has been designed with a memory
capability, may be connected to a printer, and with a software upgrade may be
connected to the hospital's patient information system. The internal memory of
the TAS analyzer allows for the storage of up to 1,000 individual test results
and has an alphanumeric keypad that allows for the input of up to a
20-character patient identification code. Additionally, the keypad provides for
coded entry so only authorized personnel can gain access to the system. The TAS
analyzer can operate either on wall current or on an internal rechargeable
battery.
CURRENT TEST CARDS
The aPTT test is a coagulation screening test which may be used in
conjunction with the PT to provide a global assessment of a patient's ability
to form a clot. In addition, the aPTT test is used to monitor heparin, an
injectable anticoagulant. Hospitals routinely use heparin as the initial
treatment for patients with a clot, including patients suffering from heart
attacks or strokes. Heparin also prevents clots from forming in patients
undergoing procedures involving particular risks of clotting, such as
angioplasties, angiograms, open heart surgeries, dialyses and certain other
surgeries. Heparin must be closely monitored to assure adequate anticoagulation
without increasing the risk of developing a bleeding complication. Time is
particularly important when monitoring heparin, since the drug affects a
patient's coagulation system within minutes.
The PT test is a general screening test that is used to assess a patient's
baseline hemostatic function or to monitor the use of warfarin, an oral
anticoagulant. Although they are both anticoagulants, heparin and warfarin work
in different ways and require different tests to monitor their functions.
Warfarin is widely used for long-term treatment in patients who have previously
developed clots, including after heart attacks, in order to inhibit coagulation
and reduce the risk of developing additional clots. A physician uses the PT
test to monitor and maintain drug levels within a safe treatment range; that
is, too little warfarin will not prevent a new clot from developing, but too
much of the drug may result in a bleeding complication.
The Company manufactures and markets three different types of PT test
cards, a general purpose PT test card routinely used in the United States, the
PT One, which uses a more sensitive scale of measurement, and the PT-NC, which
is used with finger stick samples. The PT One is currently the preferred test
for all indications in Europe and is rapidly becoming popular in the United
States.
Generally, aPTT tests are incapable of monitoring high levels of heparin.
Therefore, the Company developed its HMT for monitoring patients requiring high
dose heparin therapy during procedures such as open heart surgeries or
dialyses. For example, during the course of an open heart surgery, the
patient's blood may be tested as many as four to six times to assure an
adequate heparin effect. The Company believes that its HMT is a more effective
test than the Activated Clotting Time test ("ACT") currently used for
procedures requiring high dose heparin therapy. Unlike ACT, HMT is not
sensitive to changes in blood temperature or dilution, such as typically occur
during open heart surgery. Clinical trials also indicate that HMT more closely
correlates with a precise but time-consuming laboratory measurement of heparin
concentration than does ACT. Finally, the Company believes that HMT is easier
to perform and is less prone to operator error than ACT.
The Low-range Heparin Management Test ("LHMT") card is intended to monitor
the moderate levels of heparin used during certain surgical procedures,
including angioplasty and cardiac surgery on pediatric patients. The SK Panel
is designed to assess a patient's response to one of the most commonly used
thrombolytic drugs, streptokinase. Since approximately
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10% of patients may develop neutralizing antibodies or inhibitors to
streptokinase (which prevent the drug from being effective), physicians often
use the more expensive thrombolytic drug, t-PA, rather than risk ineffective
therapy with streptokinase. The SK Panel provides the physician with objective
information on which to base a decision regarding the choice of thrombolytic
drug. The SK Panel consists of two test cards. One of the cards is designed to
test the patient's response to high levels of streptokinase. The other card,
the Lytic Control test, is designed to identify possible defects in a patient's
fibrinolytic system that may interfere with all thrombolytic therapy.
The LOT test is designed to monitor a patient's response to any of the
currently used thrombolytic drugs, including streptokinase, t-PA and urokinase.
The LOT test is used during the administration of any thrombolytic drug to
detect the establishment of the lytic state, after which additional
administration of the drug may no longer be efficacious. Before the Company
developed the LOT test, there was no rapid, precise method for monitoring the
effects of thrombolytic therapy. With the information provided by the LOT test,
healthcare providers can optimize thrombolytic therapy, providing for better,
more cost-effective patient care.
The Ecarin Clotting Time ("ECT") test is designed to monitor the effect of
a new class of anticoagulant drugs, "antithrombins" such as hirudin or
argatroban.
TEST CARDS UNDER DEVELOPMENT
The Company is currently studying the feasibility and developing several
new tests to expand the menu for the TAS Analyzer. The Company is studying and
developing new tests to complement the aPTT and HMT in a complete heparin
monitoring package. The Company's low range fibrinogen ("LRF") test is a new
test under development that will allow a physician to monitor the effects of
Ancrod, a new drug for the treatment of stroke. In addition, the Company has
tests under development to monitor thrombin inhibitors and a new drug to treat
sepsis. The Company has also developed versions of certain of its test cards,
including PT and HMT, which would allow testing of noncitrated, as well as
citrated, blood.
QUALITY CONTROL PRODUCTS
The Company also develops and manufactures single-use "crush-vial"
controls for each test card. These controls allow quality assurance testing at
the point of care. In addition, the Company is developing Electronic Quality
Control ("EQC") cards to test analyzer function.
SALES AND MARKETING
The Company commenced marketing TAS products in May 1995. As of June 30,
1998 the Company had sold approximately 1,400 analyzers in the United States
and in Europe. In 1996, the Company initiated a sales and marketing strategy,
with a direct sales force targeting hospitals with over 200 beds. Through this
initiative the Company achieved its goal of gaining recognition for its
technology and was able to attract several strategic partners. In October 1996,
the Company signed an exclusive, five-year development and distribution
agreement with Dade International, Inc. ("Dade"). At that time, the marketing
focus was shifted to begin targeting major corporate accounts and integrated
health networks ("IHNs"). In 1997 and 1996, Dade represented 17% and 3% of
total Company sales. The Company also entered into an agreement with Avecor
Cardiovascular to distribute the Company's Heparin Management Test ("HMT") to
hospitals. In August 1998, the agreements with Dade and Avecor were terminated
effective December 1998, at which time Chiron Diagnostics will become the
Company's new distribution partner pursuant to the agreement discussed below.
In connection with the Company's termination of the Dade agreement, the Company
agreed to continue to supply Dade's existing customers for 3 years.
In August 1998, the Company signed a five-year distribution agreement,
subject to minimum annual sales by Chiron Diagnostics, with Chiron Diagnostics
(the "Chiron Agreement") to distribute the Company's PT, aPTT, HMT and LHMT
test cards in North America and certain South American, European and Asian
countries. At that time, the Company received an up-front investment of $6
million from Chiron Diagnostics. See "Certain Transactions". The Company
believes that Chiron Diagnostics has a strong global presence and that its
shared strategy for expanding rapid diagnostic platforms into critical care
settings and its considerable presence in these specialized areas of the
hospital will lead to increased placements of TAS products. The Company also
believes that the TAS products are complementary with Chiron Diagnostics'
leading market position in blood gas analysis. Chiron Diagnostics expects to
begin marketing the Company's products covered by the agreement beginning in
January 1999, following the termination of the distribution agreements with
Dade and Avecor Cardiovascular in December 1998. In addition, Chiron
Diagnostics has the contingent right to distribute outside the U.S. with
respect to certain test cards currently under development. In September 1998,
Bayer Group agreed to acquire Chiron Diagnostics. The Company believes Bayer's
position as a global leader in diagnostics will make it a good partner.
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Under the Chiron Agreement, Chiron Diagnostics agreed to purchase minimum
quantities of the Company's products covered by the agreement during the term
of the agreement at pre-determined prices. The Chiron Agreement is renewable
for successive five-year terms. The Company has the right to terminate the
agreement if (1) Chiron Diagnostics does not meet annual or semiannual sales
targets, (2) Chiron Diagnostics fails to make payments when due to the Company,
and (3) a distributor appointed by Chiron Diagnostics sells products which are
competitive with the Company. Either party may terminate the Chiron Agreement
upon the occurrence of any of the following: (1) the insolvency of the other
party; (2) material breach of the agreement by other party which is not cured;
or (3) certain types of "change-in-control" transactions by the other party.
The Company also markets TAS products in Europe and elsewhere. In Europe
there are a large number of recognized experts in the fields of hematology and
cardiology. The Company's strategy to date has been to sell primarily through
selected independent distributors. During 1997, Ortho Clinical Diagnostics
signed a three-year agreement to distribute the Company's products in Italy.
Distribution agreements remain in place for the United Kingdom, Berelux and
Scandinavia, New Zealand and Australia. Upon expiration of these agreements,
Chiron Diagnostics is expected to become the Company's exclusive distributor in
these territories.
In 1997, the Company also entered into additional collaborative agreements
with Knoll AG and Eli Lilly and Company ("Eli Lilly") for the development of
test cards for potential use in patient identification and monitoring of
therapies being investigated for the treatment of ischemic stroke and sepsis,
respectively. Under each of these agreements, the Company has agreed to develop
and supply test cards and is entitled to receive development fees based upon
the achievement of product milestones, such as the filing of a 510k
application. Under each of these agreements, the Company has granted the other
party rights to purchase TAS products and test cards at pre-determined prices.
Each of these agreements is terminable by either party following the other
party's failure to cure a material breach of the agreement. Under the Knoll
agreement, if Knoll AG elects not to distribute the test cards developed
thereunder in the United States, the Company must pay a royalty to Knoll AG
based on the number of cards distributed in the United States for three years.
The Knoll agreement is for a term of ten years following the first sale by
Knoll AG of its product for an indication relating to stroke. If Knoll AG
terminates the agreement without cause or discontinues development of its
product, it must pay a fee to the Company. Either party may terminate the Eli
Lilly agreement if Eli Lilly substantially ceases efforts with respect to its
product's clinical trials. In addition, upon completion of certain phases of
development contemplated by the Eli Lilly agreement, Eli Lilly may terminate
the agreement following its receipt of the applicable final study report for
such phase.
Coeur's products are marketed worldwide, primarily to power injector
manufacturers and, to a lesser extent, end users who perform diagnostic
procedures. There are three principal power injector manufacturers and Coeur
manufactures disposable syringes, on an original equipment manufacturing
("OEM") basis, for two of these manufacturers, Liebel Flarsheim ("LF"), a
wholly owned subsidiary of Mallinkrodt Group, Inc., and E-Z-EM. As a percentage
of total Company sales in 1997, 1996 and 1995, sales to LF represented 30%, 34%
and 40%, respectively, and sales to E-Z-EM represented 18%, 10% and 12%,
respectively.
The commercial success of the Company's products will depend upon their
acceptance by the medical community and third-party payors as useful and
cost-effective. Market acceptance will depend upon several factors, including
the establishment of the utility and cost-effectiveness of the Company's tests,
the receipt of regulatory clearances in the United States and elsewhere and the
availability of third-party reimbursement. The availability of point-of-care
hemostasis test systems has been limited to date, so by selling point-of-care
hemostasis test products, the Company is targeting an essentially new market.
Diagnostic tests similar to those developed by the Company are generally
performed by a central laboratory at a hospital or clinic. The approval of the
purchase of diagnostic equipment by a hospital is generally controlled by its
central laboratory. The Company expects there will be resistance by central
laboratories to yield control of tests they have previously performed. The
Company will also have to demonstrate to physicians that its diagnostic
products perform as intended, meaning that the level of accuracy and precision
attained by the Company's products must be comparable to test results achieved
by central laboratory systems. Failure of the Company's products to achieve
market acceptance would have a material adverse effect on the Company.
The Company is substantially dependent upon distributors for marketing and
distribution. There can be no assurance that the Company will be able to build
an adequate sales and marketing staff, that establishing such a sales and
marketing staff will be cost-effective, or that distributors' or the Company's
direct sales and marketing efforts will be successful. The loss of one or more
of the Company's foreign distributors or the inability to enter into agreements
with new distributors to sell TAS products in additional countries could have a
material adverse effect on the Company. There can be no assurance that the
Company or its distributors will be successful in marketing or selling the
Company's products.
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RESEARCH AND DEVELOPMENT
At June 30, 1998 the Company had a research and development staff
consisting of nine people, five of whom have Ph.D.'s in related fields.
Continuing research and development is focused on expanding the menu of tests.
See " -- Products -- Test Cards".
During fiscal 1995, fiscal 1996, fiscal 1997, and the six months ended
June 30, 1998 the Company's research and development expenses were
approximately $1,801,000, $2,300,000, $2,573,000 and $1,267,000, respectively.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Results of Operations".
COMPETITION
The medical diagnostic testing industry is characterized by rapidly
evolving technology and intense competition. TAS competes in the coagulation
and hematology testing market with manufacturers providing testing equipment to
central and stat laboratories of hospitals, since such laboratories currently
perform a substantial portion of such testing, and with other point-of-care
coagulation and hematology test system manufacturers. Laboratories provide the
same tests performed by TAS; however, these laboratory tests generally require
the use of skilled technicians and complex, expensive equipment. The Company
believes that TAS offers several advantages over these laboratory-based
instruments, including faster results, ease-of-use, reduced opportunity for
error and cost-effectiveness.
The Company has several competitors, including Boehringer Mannheim
Corporation ("BMC"), International Technidyne Corporation ("ITC") and
Medtronic, that manufacture and market point-of-care coagulation and hematology
test systems. ITC, in particular, has a large installed base of systems, which
it has been selling for over 20 years. Despite the fact that the Company
believes that TAS competes favorably with these systems, ITC's installed base
could give it a competitive advantage. Although the market for point-of-care
coagulation and hematology test systems is in its early stages of development,
the Company believes that potential customers will base their purchasing
decisions upon a combination of factors, including accuracy and precision,
speed, cost-effectiveness, ease-of-use and compliance with CLIA guidelines.
If the Company introduces additional blood tests beyond its initial
coagulation and hematology tests, it will compete with numerous companies that
market similar products to hospitals for use in laboratories and at the point
of patient care. Other manufacturers and academic institutions may be
conducting research and development with respect to blood testing technologies
and other companies may in the future engage in research and development
activities regarding products competitive with those of the Company. Many of
the companies in the medical technology industry, including those listed above,
have substantially greater capital resources, research and development staffs,
sales and manufacturing capabilities and manufacturing facilities than the
Company. Such entities may be developing or could in the future attempt to
develop additional products competitive with TAS. Many of these companies also
have substantially greater experience than the Company in research and
development, obtaining regulatory clearances, manufacturing and marketing, and
may therefore represent significant competition for the Company. There can be
no assurance that the Company's competitors will not succeed in developing or
marketing technologies and products that will be more effective or less
expensive than those being marketed by the Company or that would render the
Company's technology and products obsolete or noncompetitive.
PATENTS AND OTHER INTELLECTUAL PROPERTY
The Company pursues patent applications to provide protection from
competitors. A number of U.S. and corresponding international patents have been
issued to the Company covering various aspects of the TAS technology. These
patents expire between 2004 and 2013. The Company has filed, and is pursuing, a
number of additional U.S. and international patent applications.
The Company's success will depend in part on its ability to enforce its
patents, to preserve its trade secrets and to operate without infringing the
proprietary rights of third parties. The Company's ability to protect its
proprietary position is also in part dependent on the issuance of additional
patents on current and future applications. The validity and breadth of claims
covered in medical technology patents involve complex legal and factual
questions. No assurance can be given that any patent applications will be
issued, that the scope of any patent protection will exclude competitors or
provide competitive advantages to the Company, that any of the Company's
patents will be held valid if subsequently challenged or that others will not
claim rights in or ownership to the patents and other proprietary rights held
by the Company. Furthermore, there can be no assurance that others have not
developed or will not develop similar products, duplicate any of the Company's
products or design around the Company's patents. In addition, others may hold
or receive patents or file patent applications which contain claims having a
scope that covers products developed by the Company. In the event that any
relevant claims
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of third-party patents are upheld as valid and enforceable, the Company could
be prevented from practicing the subject matter claimed in such patents or
could be required to obtain licenses from the patent owners of each of such
patents or to redesign its products or processes to avoid infringement. There
can be no assurance that such licenses would be available or, if available,
would be on terms acceptable to the Company or that the Company would be
successful in any attempt to redesign its products or processes to avoid
infringement.
The Company also relies upon unpatented trade secrets to protect its
proprietary technology. In particular, the Company believes that its
custom-designed automated test card production line embodies proprietary
Company process technology. No assurance can be given that others will not
independently develop or otherwise acquire equivalent technology or otherwise
gain access to the Company's proprietary technology or that the Company can
ultimately protect meaningful rights to such unpatented proprietary technology.
There has been substantial litigation regarding patent and other
intellectual property rights in the medical device industry. In March 1997, the
Company filed a lawsuit against BMC alleging, among other things,
misappropriation of trade secrets. See "Legal Proceedings". This and any other
litigation, which would result in substantial cost to and diversion of effort
by the Company, may be necessary to enforce patents issued to the Company, to
protect trade secrets or know-how owned by the Company, to defend the Company
against claimed infringement of the rights of others or to determine the
ownership, scope or validity of the proprietary rights of the Company and
others. An adverse determination in any such litigation could subject the
Company to significant liability to third parties, could require the Company to
seek licenses from third parties, which licenses may not be available or, if
available, may not be on terms acceptable to the Company; and ultimately could
prevent the Company from manufacturing, selling or using its products, any of
which could have a material adverse effect on the Company.
LICENSES
TOKUYAMA SODA LICENSE
In October 1988, the Company entered into a License Agreement with
Tokuyama Soda Company, Ltd. ("Tokuyama") pursuant to which the Company granted
Tokuyama exclusive rights to manufacture and sell PT and aPTT tests and
analyzers in Myanmar, Brunei, Hong Kong, Indonesia, Japan, Malaysia, China,
Philippines, Taiwan, South Korea, Singapore and Thailand (the "Tokuyama
License"). The Tokuyama License requires that the Company negotiate in good
faith with Tokuyama for 90 days prior to marketing or licensing in these Asian
nations any new products that the Company develops related to the licensed
tests or analyzer technology.
In 1988 and 1989, Tokuyama paid the Company an aggregate license fee of
$1,080,000 pursuant to the Tokuyama License. In addition, until the earlier of
October 2004 or the expiration of the last Japanese patent covering the
licensed technology, Tokuyama must pay the Company royalties based on
Tokuyama's net sales of licensed products, subject to annual minimums through
September 2000. The Company can terminate the Tokuyama License if Tokuyama
fails to make a required payment or report (or makes a false report), or if
Tokuyama voluntarily ceases the manufacture and sale of licensed products for
12 months, and if, in any such case, Tokuyama fails to remedy such default
within 60 days after notice thereof from the Company.
In December 1995, the Company and Tokuyama amended the Tokuyama License,
to, among other things, provide the Company with the right to market PT and
aPTT tests and analyzers in an Asian country (other than Japan, Taiwan and
South Korea) if Tokuyama has not attained annual net sales of $250,000 in the
country by June 30, 1996 (or within 12 months of the time when export to such
country becomes authorized). In the event the Company exercises this right, it
and Tokuyama may both market in the country and must each pay royalties to the
other. To date, the Company has not exercised this right. The amendment also
provides that the Company owns all rights outside Asia to Tokuyama improvements
to the Company's technology, and must pay royalties to Tokuyama based on
Company net sales of products incorporating such improvements.
The Company received royalty payments under this agreement of $63,176,
$32,835 and $30,741 during the years ended December 31, 1995, 1996 and 1997,
respectively, and $14,997 for the six months ended June 30, 1998.
MANUFACTURING
The Company operates a manufacturing facility in Raleigh, North Carolina
to assemble TAS analyzers. Vendors currently provide all molded parts,
mechanical components and printed circuit boards. The Company assembles the
components and provides final mechanical, electrical and chemistry testing of
each analyzer. The Company believes that it has sufficient capacity to
accommodate anticipated demand.
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The Company also operates proprietary automated test card production
equipment at its Raleigh facility. This automated production equipment was
custom-designed by the Company and built to its specifications. The Company
believes that this production machinery embodies proprietary Company process
technology. The equipment has been designed to allow for increased production
as dictated by customer demand. Programs are currently in process to increase
manufacturing capacity for the Company's test cards.
The FDC Act requires the Company to manufacture its products in registered
establishments and in accordance with Good Manufacturing Practice ("GMP") now
known as Quality System Regulations ("QSR"). The Company and Coeur are both
registered as medical device manufacturers and are subject to periodic
inspections by the FDA. In addition, the Company received ISO 9001
certification in 1997.
To be successful, the Company must manufacture its products in compliance
with regulatory requirements, in sufficient quantities and on a timely basis,
while maintaining product quality and acceptable manufacturing costs. The
Company has limited experience producing its products in large commercial
quantities. There can be no assurance that the Company will be able to
manufacture accurate and reliable products in large commercial quantities on a
timely basis and at an acceptable cost.
Most of the raw materials and components used to manufacture the Company's
TAS products are readily available. However, certain of these materials are
obtained from a sole supplier or a limited group of suppliers. For example, the
Company currently obtains the PIOP used in the TAS test cards from a single
source. However, the Company maintains enough PIOP to produce the Company's
test cards for an extended period of time. The Company believes that, in the
event of an interruption in the availability of PIOP from such supplier, the
Company has enough PIOP at its facility to supply its needs until an
alternative source could be procured. The Company generally does not maintain
long-term agreements with any of its suppliers. The reliance on sole or limited
suppliers and the failure to maintain long-term agreements with suppliers
involves several risks, including the inability to obtain an adequate supply of
required raw materials and components and reduced control over pricing, quality
and timely delivery. Any interruption in supply could have a material adverse
effect on the Company.
GOVERNMENT REGULATION
FDA
The medical devices to be marketed and manufactured by the Company are
subject to extensive regulation by the FDA. Pursuant to the FDC Act, the FDA
regulates the clinical testing, manufacture, labeling, distribution and
promotion of medical devices. Noncompliance with applicable requirements can
result in, among other things, fines, injunctions, civil penalties, recall or
seizure of products, total or partial suspension of production, failure of the
government to grant premarket clearance or premarket approval ("PMA") for
devices, withdrawal of marketing approvals and criminal prosecution. The FDA
also has the authority to request repair, replacement or refund of the cost of
any device manufactured or distributed by the Company.
In the United States, medical devices are classified into one of three
classes (Class I, II or III), on the basis of the controls deemed necessary by
the FDA to reasonably assure their safety and effectiveness. Under the FDA
regulations, Class I devices are subject to general controls (for example,
labeling, premarket notification and adherence to QSRs) and Class II devices
are subject to general and special controls (for example, performance
standards, postmarket surveillance, patient registries, and FDA guidelines).
Generally, Class III devices are those which must receive a PMA from the FDA to
ensure their safety and effectiveness (for example, life-sustaining,
life-supporting and implantable devices, or new devices which have not been
found substantially equivalent to legally marketed devices).
Before a new device can be introduced into the market, the manufacturer
must generally obtain marketing clearance through either a 510(k) notification
(a "510(k)") or a PMA. Commercial distribution of a device for which a 510(k)
is required can begin only after the FDA issues an order finding the device to
be "substantially equivalent" to a predicate legally marketed Class I or II
medical device, or to a Class III medical device for which the FDA has not
required a PMA. The FDA has recently been requiring a more rigorous
demonstration of substantial equivalence than in the past. It generally takes
from four to 12 months from submission of a 510(k) to obtain a 510(k)
clearance, but it may take longer. The FDA may determine that a proposed device
is not substantially equivalent to a legally marketed device, or that
additional information is needed before a substantial equivalence determination
can be made. A request for additional data may require that clinical studies of
the device's safety and efficacy be performed. A "not substantially equivalent"
determination or a request for additional information could delay the market
introduction of new products that fall into this category and could have a
material adverse effect on the Company's business, financial condition and
results of operations. For any of the Company's
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products that are cleared through the 510(k) process, modifications or
enhancements that could significantly affect the safety or efficacy of the
device or that constitute a major change to the intended use of the device will
require a new 510(k). If the FDA requires the Company to submit a new 510(k)
for any modification to the device the Company may be prohibited from marketing
the modified device until the 510(k) is cleared by the FDA.
The Company received 510(k) clearance to market its PT and aPTT test
cards, along with a first generation analyzer, in 1988. In 1993, the Company
received 510(k) clearance for the TAS analyzer to be marketed with PT and aPTT
tests. The Company received 510(k) clearance in May 1995 to commercially market
the HMT test. The Company received 510(k) clearance for PT, HMT and aPTT
controls in 1996 and for PT-NC controls in 1997. In addition, the Company
submitted 510(k) applications for the LHMT test card in December 1997 and for
the ECT test card in January 1998. In August 1998, the FDA notified the Company
that it would require additional data before commencing its review of the
510(k) applications for the LHMT and ECT test cards. The Company is currently
assessing the amount of time it will take it to compile and submit such
additional data.
The Company submitted a 510(k) for its SK Panel in September 1993. This
submission was withdrawn in October 1994, after consultation with the FDA,
pending the conclusion of additional clinical evaluations of the SK Panel. The
SK Panel and LOT tests are currently available to be sold in Europe for
investigational use only in connection with clinical evaluations of the safety
and effectiveness of the products. Although clinical investigations of most
devices are subject to the investigational device exemption ("IDE")
requirements, a clinical investigation is exempt from the IDE requirements
provided the clinical investigation involves a noninvasive test, does not
require an invasive sampling procedure that presents significant risk, does not
introduce energy into a subject, and is not used as a diagnostic procedure
without confirmation of the diagnosis by another medically established
diagnostic product or procedure. Manufacturers must also establish distribution
controls to assure that devices distributed for the purposes of conducting
clinical investigations are used only for that purpose. Pursuant to FDA policy,
manufacturers of devices labeled "for investigational use only" must establish
a certification program under which investigational devices are distributed to
or utilized only by individuals, laboratories or healthcare facilities that
have provided the manufacturer with a written certification of compliance
indicating that: the device will be used for investigational purposes only;
results will not be used for diagnostic purposes without confirmation of the
diagnosis under another medically established diagnostic device or procedure;
all investigations will be conducted with approval from an institutional review
board ("IRB"), using an IRB-approved study protocol, and patient informed
consent; and the device will be labeled in accordance with the applicable
labeling regulations. Failure of the Company or recipients of the Company's
"investigational use only" products to comply with these requirements could
result in enforcement action by the FDA that would adversely affect the
Company's ability to conduct testing necessary to obtain market clearance and,
consequently could have a material adverse effect on the Company.
A PMA application must be filed if a proposed device is not substantially
equivalent to a legally marketed Class I or Class II device, or if it is a
Class III device for which FDA has called for PMAs. A PMA application must be
supported by valid scientific evidence which typically includes extensive data,
including preclinical and clinical trial data, to demonstrate the safety and
effectiveness of the device. In addition, the submission must include the
proposed labeling, advertising literature and training methods (if required).
FDA review of a PMA application generally takes one to two years from the date
the PMA application is accepted for filing, but may take significantly longer.
The review time is often significantly extended by the FDA asking for more
information or clarification of information already provided in the submission.
Toward the end of the PMA review process, the FDA generally will conduct an
inspection of the manufacturer's facilities to ensure that the facilities are
in compliance with applicable QSR requirements. If the FDA's evaluations are
favorable, the FDA will either issue an approval letter or an approvable
letter, which usually contains a number of conditions which must be met in
order to secure final approval of the PMA. When and if those conditions have
been fulfilled to the satisfaction of the FDA, the agency will issue a PMA
approval letter, authorizing commercial marketing of the device for certain
indications. If the FDA's evaluations are not favorable, the FDA will deny
approval of the PMA application or issue a "not approvable" letter. The FDA may
also determine that additional clinical trials are necessary, in which case PMA
approval may be delayed for several years while additional clinical trials are
conducted and submitted in an amendment to the PMA. Modifications to a device
that is the subject of an approved PMA, its labeling, or manufacturing process
may require approval by the FDA of PMA supplements or new PMAs. The PMA process
can be expensive, uncertain and lengthy and a number of devices for which FDA
approval has been sought by other companies have never been approved for
marketing. There can be no assurance that the Company will be able to obtain
necessary regulatory approvals on a timely basis, or at all, and delays in
receipt of or failure to receive such approvals, the loss of previously
received approvals, or failure to comply with existing or future regulatory
requirements would have a material adverse effect on the Company's business,
financial condition and results of operations.
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Any products manufactured or distributed by the Company pursuant to FDA
clearances or approvals are subject to pervasive and continuing regulation by
the FDA, including recordkeeping requirements and reporting of adverse
experiences with the use of the device. Device manufacturers are required to
register their facilities and list their devices with the FDA, and are subject
to periodic inspections by the FDA and certain state agencies. The FDC Act
requires devices to be designed and manufactured in accordance with QSR
regulations which impose certain procedural and documentation requirements upon
the Company with respect to design, manufacturing and quality assurance
activities. The FDA has approved changes to the regulations which may increase
the cost of complying with QSR requirements.
Labeling and promotion activities are subject to scrutiny by the FDA and
in certain instances, by the Federal Trade Commission. The FDA actively
enforces regulations prohibiting marketing of products for unapproved uses.
REGULATIONS ON EXPORT
Export of products that have market clearance from the FDA in the United
States do not require FDA authorization. However, foreign countries often
require an FDA certificate for products for export (a "CPE"). To obtain a CPE
the device manufacturer must certify to the FDA that the product has been
granted clearance in the United States and that the manufacturing facilities
appeared to be in compliance with QSRs at the time of the last FDA inspection.
The FDA will refuse to issue a CPE if significant outstanding QSR violations
exist.
Export of products subject to the 510(k) requirements, but not yet cleared
to market, are permitted without FDA authorization provided certain
requirements are met. Unapproved products subject to the PMA requirements must
be approved by the FDA for export. To obtain FDA export approvals certain
requirements must be met and information must be provided to the FDA, including
documentation demonstrating that the product is approved for import into the
country to which it is to be exported and, in some instances, safety data from
animal or human studies. There can be no assurance that the FDA will grant
export approval when such approval is necessary, or that the countries to which
the devices are to be exported will approve the devices for import.
The Company has obtained CPEs for the PT, PT One, aPTT and HMT tests and
the TAS analyzer. Failure of the Company to obtain a CPE for the export of its
products in the future could have a material adverse effect on the Company.
Products which the Company exports that do not have premarket clearance in the
United States include the SK Panel, the LOT test and the ECT test. The Company
believes that these products are subject to the 510(k) requirements and,
consequently, has not requested FDA approval for export. However, there can be
no assurance that the FDA would agree with the Company. If the FDA disagreed,
it could significantly delay and impair the Company's ability to continue
exporting the SK Panel, the LOT test and the ECT test and could have a material
adverse effect on the Company.
FOREIGN REGULATIONS
Sales of the Company's test products outside the United States are also
subject to foreign regulatory requirements that vary widely from country to
country. These laws and regulations range from simple product registration
requirements in some countries to complex clearance and production controls in
others. As a result, the processes and time periods required to obtain foreign
marketing approval may be longer or shorter than those necessary to obtain FDA
approval. These differences may affect the efficiency and timeliness of
international market introduction of the Company's products, and there can be
no assurance that the Company will be able to obtain regulatory approvals or
clearances for its products in foreign countries. Delays in receipt of, or a
failure to receive, such approvals or clearances, or the loss of any previously
received approvals or clearances, could have a material adverse effect on the
Company.
In particular, in order to market the Company's products in the member
countries of the European Union (the "EU"), the Company is required to comply
with the European Medical Devices Directive ("MDD") and to obtain CE Mark
certification of its products. The CE Mark denotes conformity with European
standards for safety and allows certified devices to be placed on the market in
all EU countries. Medical devices may not be sold in EU countries unless they
display the CE Mark. All of the Company's products marketed in Europe have
obtained CE Mark certification. There can be no assurance that the Company will
be successful in maintaining CE Mark certification of its products. In Japan,
the Company relies upon its collaborative partner, Tokuyama, to comply with
applicable regulations regarding the manufacture and sale of products in that
country. The Company believes that the Company's products are in compliance
with applicable regulations in Japan. Failure to maintain CE Mark certification
in Europe or to obtain or maintain other foreign regulatory approvals could
have a material adverse effect on the Company's business, financial condition
and results of operations.
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CLIA
The Company's products are also subject to the requirements of CLIA. This
law requires all laboratories, including those performing blood chemistry
tests, to meet specified standards in the areas of personnel qualification,
administration, participation in proficiency testing, patient test management,
quality control, quality assurance and inspections. The regulations have
established three levels of regulatory control based on test complexity --
"waived", "moderate complexity" and "high complexity". The PT, aPTT and HMT
tests performed by TAS have been categorized by the FDA and the Centers for
Disease Control and Prevention (the "CDC") as moderate complexity tests. There
can be no assurance that these tests will not be recategorized, or that other
tests performed by the TAS will not be categorized as high complexity tests or
that such a categorization will not have a material adverse effect on the
Company. Furthermore, there can be no assurance that regulations under and
future administrative interpretations of CLIA will not have an adverse impact
on the potential market for the Company's products.
Laboratories that perform either moderate or high complexity tests must
meet certain standards, with the major difference in requirements being quality
control and personnel standards. Quality control standards for moderate
complexity tests (not modified by laboratories) are being implemented in
stages, while laboratories performing high complexity and modified moderate
complexity tests currently must meet all of the quality control requirements.
Personnel standards for high complexity tests require that personnel have more
education and experience than personnel conducting moderate complexity tests.
All laboratories performing moderately complex or highly complex tests are
required to obtain either a registration certificate or certification of
accreditation from the Health Care Financing Administration. With certain
specified exceptions, each site for laboratory testing must file a separate
application and separately meet all CLIA requirements. Multiple laboratory
sites within a hospital located at contiguous buildings on the same campus and
under common direction may file a single application. As a result of the CLIA
requirements, hospitals may be discouraged from expanding point-of-care
testing. Because CLIA certification must be obtained by laboratories, the
Company does not possess sufficient data to make a determination as to the cost
of certification to a laboratory or the potential inhibiting effect of CLIA
certification on the purchase of the Company's products by laboratories.
OTHER REGULATIONS
Company and its products are also subject to a variety of state and local
laws and regulations in those states or localities where its products are or
will be marketed. Any applicable state or local laws or regulations may hinder
the Company's ability to market its products in those states or localities. Use
of the Company's products will also be subject to inspection, quality control,
quality assurance, proficiency testing, documentation and safety reporting
standards pursuant to the Joint Commission on Accreditation of Healthcare
Organizations. Various states and municipalities may also have similar
regulations.
Manufacturers are also subject to numerous federal, state and local laws
relating to such matters as safe working conditions, manufacturing practices,
environmental protection, fire hazard control and disposal of hazardous or
potentially hazardous substances. There can be no assurance that the Company
will not be required to incur significant costs to comply with such laws and
regulations now or in the future or that such laws or regulations will not have
a material adverse effect upon the Company.
Changes in existing requirements or adoption of new requirements or
policies could adversely affect the ability of the Company to comply with
regulatory requirements. Failure to comply with regulatory requirements could
have a material adverse effect on the Company. There can be no assurance that
the Company will not be required to incur significant costs to comply with laws
and regulations in the future or that laws or regulations will not have a
material adverse effect upon the Company.
REIMBURSEMENT
The Company's ability to commercialize its products successfully depends
in part on the extent to which reimbursement for the cost of such products and
related treatment will be available from government health administration
authorities (such as the Health Care Financing Administration (the "HCFA")),
which determines Medicare reimbursement levels), private health insurers and
other organizations ("Payors"). Payors are increasingly challenging the prices
of medical products and services. Payors may deny reimbursement if they
determine that a prescribed device has not received appropriate FDA or other
governmental regulatory clearances, is not used in accordance with
cost-effective treatment methods, or is experimental, unnecessary or
inappropriate. Also, the trend towards managed healthcare in the United States
and the concurrent growth of organizations such as HMOs, which could control or
significantly influence the purchase of healthcare services and products, as
well as legislative proposals to reform healthcare or reduce government
insurance programs, may result in customers demanding lower prices for the
Company's TAS products. The cost containment measures that healthcare
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providers are instituting and the impact of any healthcare reform could have an
adverse effect on the Company's ability to sell its products and may have a
material adverse effect on the Company.
Effective October 1991, HCFA adopted new regulations providing for the
inclusion of capital-related costs in the prospective payment system, under
which providers are reimbursed on a per-discharge basis at fixed rates
unrelated to actual costs, based on diagnostic related groups. Under this
system of reimbursement, equipment costs generally will not be reimbursed
separately, but rather, will be included in a single, fixed-rate, per-patient
reimbursement. These regulations are being phased in over a 10-year period,
and, although the full implications of these regulations cannot yet be known,
the Company believes that the new regulations will place more pressure on
hospitals' operating margins, causing them to limit capital expenditures. These
regulations could have an adverse effect on the Company's results of operations
if hospitals decide to defer obtaining medical equipment as a result of any
such limitation on their capital expenditures. The Company is unable to predict
the effect on the Company, if any, additional government regulations,
legislation or initiatives or changes by other Payors affecting reimbursement
or other matters which may influence decisions to obtain medical equipment.
There can be no assurance that reimbursement in the United States or
foreign countries will be available for any of the Company's products, or that
if available it will not be decreased in the future, or that any reduction in
reimbursement amounts will not reduce the demand for or the price of the
Company's products. The unavailability of third-party reimbursement or the
inadequacy of the reimbursement for medical procedures using the Company's
tests would have a material adverse effect on the Company. Moreover, the
Company is unable to forecast what additional legislation or regulations, if
any, relating to the healthcare industry or third-party coverage and
reimbursement may be enacted in the future or what effect such legislation or
regulations would have on the Company.
COEUR'S BUSINESS
On October 31, 1993, the Company acquired Coeur, which manufactures and
sells a line of disposable power injection syringes used for cardiology and
radiology procedures, as well as a line of manifolds used in custom
angiographic procedure kits. The Company acquired Coeur in order to gain access
to Coeur's management and infrastructure, its positive annual cashflow and its
manufacturing facility. The Company believes that the acquisition of Coeur has
accelerated the commercialization of TAS.
Because Coeur does not manufacture injectors and has no direct sales
force, its primary customers for disposable syringes are injector
manufacturers. The three principal injector manufacturers are Medrad (which is
the market leader), Liebel-Flarsheim and E-Z-EM. Coeur's unique marketing
position is a result of a patent that allows Coeur to manufacture an
alternative to Medrad 200m1 syringes, which model represents approximately half
of all disposable syringe sales. Because hospitals typically use more than one
manufacturer's injector, salesmen must have a full line of syringes capable of
fitting each type of injector. Liebel Flarsheim and E-Z-EM buy 200m1 syringes
from Coeur, because Coeur's patent makes it the only current alternative source
for Medrad 200m1 syringes. In addition, Coeur manufactures, on an OEM basis,
all disposable syringes for E-Z-EM injectors. For the fiscal year ended
December 31, 1997, E-Z-EM, Liebel-Flarsheim and Kimal Scientific Products Ltd.
each represented more than 10%, and in total represented 87% of Coeur's net
sales.
Coeur's other product line is manifolds, which historically have been sold
to kit manufacturers as components for custom angiographic kits. Most kit
components are commodity products and not proprietary. Management believes that
future sales trends will be toward more standardization of angiographic kits.
Additional competitors are expected to enter the custom kit market and pricing
will become more competitive. Since its acquisition by the Company in October
1993, Coeur has operated profitably and therefore helped fund the Company's
activities related to its diagnostic products. While the Company does not
expect to rely upon profits from Coeur to fund a significant portion of its
operations, there can be no assurances that Coeur will remain profitable.
Coeur's business is subject to various risks, including the limited market for
its products, competition, decreases in gross profits attributable to increases
in the price of raw materials, technological obsolescence, uncertainty of
protection of patents and other proprietary technology, reliance upon its
distributors and a limited number of customers, and governmental regulation.
PRODUCT LIABILITY AND INSURANCE
The Company faces an inherent business risk of exposure to product
liability claims in the event that the use of its products is alleged to have
resulted in adverse effects. The Company maintains product liability insurance
with coverage of up to $11 million per claim, with an annual aggregate policy
limit of $12 million. There can be no assurance that liability
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claims will not exceed the coverage limits of such policies or that such
insurance will continue to be available on commercially acceptable terms, or at
all. Consequently, product liability claims could have a material adverse
effect on the company's business, financial condition and results of
operations.
EMPLOYEES
The Company had 85 employees as of June 30, 1998. Nine employees were
engaged in research and development, 50 in manufacturing and quality control,
11 in engineering, five in sales/marketing and 10 in finance/administration.
Many of the Company's executive and technical personnel have had experience
with biomedical diagnostics companies. None of the Company's employees are
covered by a collective bargaining agreement and the Company believes that
employee relations are good.
The Company's success depends to a significant extent upon management and
technical personnel, none of whom have employment agreements with the Company.
Although the Company maintains a $500,000 key man life insurance policy on its
chief executive officer, the loss of the service of this officer could have a
material adverse effect on the Company's business, financial condition and
results of operations. The Company also believes that its future success will
depend in large part upon its ability to attract and retain highly skilled
technical, management and sales and marketing personnel. Competition for such
personnel is intense, and there can be no assurance that the Company will be
successful in attracting and retaining such personnel. The Company's failure to
attract, hire and retain these personnel would have a material adverse effect
on the Company.
FACILITIES
CVDI's executive offices are located at 5301 Departure Drive, Raleigh,
North Carolina 27616, and its telephone number is (919) 954-9871. The Company
occupies approximately 55,000 square feet of development, production and
administration space at that location pursuant to a facility lease that runs
through January 2001.
LEGAL PROCEEDINGS
In August 1992, Ciba Corning sent a letter to the Company stating it
appeared that the Company infringed patents owned by Biotrack Inc.
("Biotrack"), a wholly-owned subsidiary of Ciba Corning, and that the Company
should cease any activity that infringed the patents. In September 1992, the
Company responded that it believes that it is not infringing Biotrack's patents
and that its issued U.S. patents protect all of its products which are
currently cleared by the FDA or in clinical trials. Since September 1992, BMC
has acquired Biotrack, and the Company has had no further contact with Biotrack
or its parent concerning this matter until March 1996, when BMC sent another
letter to the Company alleging infringement. The Company intends to defend
itself vigorously in connection with these allegations.
In March 1997, the Company filed suit in U.S. District Court for the
Eastern District of North Carolina, charging BMC with misappropriation of the
Company's trade secrets by improper disclosure, breach of contract, breach of
fiduciary duty, unfair and deceptive trade practices, and constructive fraud.
In addition, the Company requested a declaratory judgment that neither the
products nor activities of the Company infringe U.S. patents purportedly owned
by BMC. In April 1997, BMC answered the claims and submitted a patent
infringement counterclaim against CVDI. Each party filed a motion for judgment
on the pleadings with respect to all claims asserted by the other party. In
November 1997, the Court issued a Judgment and Order granting CVDI's motion for
judgment on the pleadings, holding that CVDI has a license, until June 21, 1999
or until the last of the patents expire, to the patents at issue. It dismissed
all other claims of the parties. Both parties have appealed and are awaiting
the Court's decision.
25
<PAGE>
SELECTED FINANCIAL DATA OF CVDI
The selected financial data presented below summarizes certain financial
data and should be read in conjunction with the more detailed financial
statements of the Company and the notes thereto. Also see "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business".
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, YEARS ENDED DECEMBER 31,
------------------------- ---------------------------------------------------
1998 1997 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS (000'S)
Net sales .................... $ 4,596 $ 4,043 $ 7,618 $ 6,411 $ 5,199 $ 4,695
Cost of good sold ............ 3,149 2,950 6,169 5,257 4,268 3,021
-------- -------- -------- -------- -------- --------
Gross profit ................ 1,447 1,093 1,449 1,154 931 1,674
-------- -------- -------- -------- -------- --------
OPERATING EXPENSES:
Research and development...... 1,608 1,765 2,573 2,300 1,801 1,882
General and adminis-
trative ..................... 404 623 3,594 2,933 2,191 1,441
Sales and marketing .......... 1,267 1,171 1,347 1,896 1,278 453
-------- -------- -------- -------- -------- --------
Total operating
expenses .................. 3,279 3,559 7,514 7,129 5,270 3,776
-------- -------- -------- -------- -------- --------
Other income, net ............ 360 1,070 1,468 906 469 365
Provision for income
taxes ....................... (52) (29) (82) (52) (82) (91)
-------- -------- -------- -------- -------- --------
Net loss .................... $ (1,524) $ (1,425) $ (4,679) $ (5,121) $ (3,952) $ (1,828)
======== ======== ======== ======== ======== ========
Basic and diluted loss per
common share ................ $ (0.23) $ (0.21) $ (0.70) $ (0.78) $ (0.74) $ (0.35)
Weighted average shares
outstanding ................. 5,782 5,722 6,722 6,566 5,323 5,179
<CAPTION>
TWO-MONTH
PERIOD ENDED YEAR ENDED
DECEMBER 31, OCTOBER 31,
-------------- ------------
1993 1993
-------------- ------------
<S> <C> <C>
RESULTS OF OPERATIONS (000'S)
Net sales .................... $ 738 $ --
Cost of good sold ............ 570 --
------ --------
Gross profit ................ 168 --
------ --------
OPERATING EXPENSES:
Research and development...... 283 2,085
General and adminis-
trative ..................... 357 1,051
Sales and marketing .......... 33 256
------ --------
Total operating
expenses .................. 673 3,392
------ --------
Other income, net ............ 32 1,050
Provision for income
taxes ....................... (4) --
--------- --------
Net loss .................... $ (477) $ (2,342)
======== ========
Basic and diluted loss per
common share ................ $(0.10) $ (0.65)
Weighted average shares
outstanding ................. 4,600 3,626
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30, AS OF DECEMBER 31,
--------------------------- ------------------------------------------------------
1998 1997 1997 1996 1995 1994
------------- ------------- ------------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
FINANCIAL CONDITION (000'S)
Cash and cash equivalents ........... $ 3,800 $ 2,095 $ 5,885 $ 2,716 $ 16,237 $ 3,206
Total assets ........................ $ 15,024 $ 16,850 $ 17,685 $ 18,351 $ 23,986 $ 8,328
Long term debt, excluding current
portion ............................ $ 2,030 $ 11 $ 2,351 $ 67 $ 499 $ 269
Total liabilities ................... $ 3,204 $ 615 $ 4,492 $ 683 $ 2,176 $ 901
Accumulated deficit ................. $ (22,143) $ (17,365) $ (20,619) $ (15,940) $ (10,819) $ (6,867)
Shareholders' equity ................ $ 11,820 $ 16,235 $ 13,193 $ 17,668 $ 21,810 $ 7,428
<CAPTION>
AS OF
OCTOBER 31,
------------
1993
------------
<S> <C>
FINANCIAL CONDITION (000'S)
Cash and cash equivalents ........... $ 626
Total assets ........................ $ 5,468
Long term debt, excluding current
portion ............................ $ 330
Total liabilities ................... $ 1,346
Accumulated deficit ................. $ (4,562)
Shareholders' equity ................ $ 4,422
</TABLE>
26
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
This discussion contains forward-looking statements. The Company's actual
results might differ materially from those projected in the forward-looking
statements for various reasons, including development risks, the possibility of
pressure from managed care hospitals to decrease prices, the availability of
products from vendors, the timing of orders from customers, the ability to
determine proper inventory levels and the possibility of competition entering
the point-of-care hemostasis monitoring market. Additional information
concerning factors that could cause actual results to materially differ from
those in the forward-looking statements is contained herein (including under
the heading " -- Factors That May Affect Future Results").
CVDI is located in Raleigh, North Carolina, within a 55,000 square foot
facility housing office space, research labs and manufacturing clean rooms.
CVDI develops, manufactures and markets the Thrombolytic Assessment System
("TAS"), a proprietary cardiovascular diagnostic test system that provides
rapid and accurate valuation of hemostasis at the point of patient care. CVDI's
subsidiary, Coeur Laboratories, Inc. ("Coeur"), located within the Raleigh
facility, assembles and sells disposable power injection syringes used for
cardiology and radiology procedures, as well as a line of manifolds sold in
custom angiographic procedure kits (collectively, the "Imaging Products").
The Company derives income from the following sources: TAS and Imaging
Product sales; grants; interest income; and development income recognized in
connection with collaboration agreements. Coeur product sales in 1997, 1996 and
1995 represented 62%, 71% and 89%, respectively, of total Company sales.
During 1996, the Company had salespeople covering the major metropolitan
areas across the United States and nine distributors selling into 13 countries,
compared to two distributors in Europe at the beginning of 1995. Because of the
speed and the ease of use of the TAS product and the high correlation between
the testing results from CVDI's product with the testing results obtained by
hospitals' central laboratories, the laboratory response to CVDI's technology
was largely positive. However, throughout 1996 and 1997, individual hospitals
continued to consolidate into IHNs, which delayed many pending decisions to
adopt the new technology provided by TAS, and created a demand for standardized
test results from one hospital to another. CVDI offers a technological
breakthrough capable of providing rapid diagnostic test results standardized to
the central laboratory tests. In 1996 CVDI signed a North American distribution
agreement with Dade, in 1997 CVDI signed additional distribution agreements in
niche markets with Avecor Cardiovascular and Johnson & Johnson's Ortho Clinical
Diagnostics S.p.A. in Italy, and in August 1998 CVDI signed a global
distribution agreement with Chiron Diagnostics. These agreements allowed the
Company to reduce its sale force and are consistent with the Company's strategy
of seeking to provide a comprehensive, standardized, rapid, point-of-care
hemostasis testing solution, while also developing specialty tests that should
have higher margins.
During 1997, the marketing of CVDI's tests for routine anticoagulants was
delayed while the dry chemistry tests were calibrated to conform to Dade's wet
chemistry reagents. In addition, the ongoing consolidation of hospitals and
diagnostic companies increased the need to offer an expanded test menu beyond
the initial routine coagulation tests.
The growth of large IHN's has given them increased purchasing power which,
along with competition from existing testing procedures for routine coagulation
tests, has put pricing pressure on the Company's test cards. The Company's
agreements with its distributors provide for fixed prices, which the Company
could be forced to reduce as a result of pricing pressure. Fixed pricing could
also have a material adverse effect on the Company's results of operations if
its costs increase unexpectedly. Given the consolidating hospital market and
pricing pressures, the Company's strategy has evolved towards becoming more
focused on the development of specialty tests for drugs, some with narrow
ranges between over- and under-dosage. The Company believes that rapid
diagnostic capabilities improve patient care and turnover, and that there is a
market trend to obtain diagnostic information faster in order to effect therapy
sooner. The Company also believes that these trends should allow the Company to
obtain higher pricing of these specialty tests. As a result, during 1997 the
Company exhibited the flexibility of the TAS platform and the potential to
expand its menu of specialty tests by signing collaboration agreements with
Knoll AG and Eli Lilly and Company to monitor the effects of certain new drugs
that are in clinical trials. The Company believes that these and other
collaborations for specialty tests will also further demand for analyzers and
routine anticoagulant tests. The Company believes it is well positioned in its
development efforts to expand its menu of tests to monitor developmental drugs
where rapid therapeutic intervention is needed.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1998 VS. JUNE 30, 1997. Net sales for the six
months ended June 30, 1998 were $4,596,000, comprised of $1,214,000 of test
cards sales, $819,000 of other TAS product sales and $2,563,000 of Imaging
Product sales. Test card revenue increased $336,000 from the same period in the
prior year mainly due to sales attributable to a large order
27
<PAGE>
received from Knoll AG early in 1998. Other TAS product revenue was higher by
$333,000 in 1997 due to large orders placed by Dade in the first six months of
1997 as part of its distribution agreement. TAS analyzer sales in the first six
months ended June 30, 1998 totaled approximately 270, compared to approximately
580 in calendar year 1997 and 400 in 1996. Since the TAS was brought to market,
the Company has sold approximately 1,400 analyzers worldwide. Imaging Product
revenues increased $550,000 due to larger orders from several significant
customers. Cost of goods sold increased 7%, and the 1998 year-to-date gross
profit of 32% was an improvement from the 27% in the prior year due to higher
volumes, manufacturing efficiencies and material cost savings.
Total operating expenses of $3,279,000 represents a decrease of $280,000
or 8% compared to the same period in 1997. General and administrative expenses
declined due to lower litigation expenses and fewer personnel. Sales and
marketing expenses also declined due to fewer personnel and due to the
elimination of a sales office in Germany in late 1997. Fewer personnel also led
to decreased travel costs compared to the same period in 1997. Research and
development expenses increased 8% compared to the same period in 1997 due to
higher cost of supplies, personnel and validation processes related to on-going
development projects as well as for projects for which 510(k)'s were submitted
early in 1998.
Interest expense for the period ended June 30, 1998 was $180,000, compared
to $1,000 in the prior year period. The increase was due to long-term debt
obtained by the Company in December 1997. Interest income decreased $95,000
compared to the same period in 1997 due to decreased investments as funds were
used to support operations.
The Company recorded development income of $375,000 for the six months
ended June 30, 1998. This compares to $725,000 of development income recorded
in the period ended June 30, 1997. Development income in 1997 resulted from
entering three new collaborations with pharmaceutical companies. The
development income in 1998 resulted from the achievement of milestones related
to these collaborations.
For the six months ended June 30, 1997, other comprehensive income (loss),
net, consists of foreign currency translation adjustments related to a foreign
subsidiary. Operations of the subsidiary were ceased during the year ended
December 31, 1997.
YEAR ENDED DECEMBER 31, 1997 VS. YEAR ENDED DECEMBER 31, 1996. Sales for
the year ended December 31, 1997 increased 19% to $7.6 million compared to $6.4
million in 1996. Test card sales increased $610,000 and other TAS product sales
increased $484,000 from the prior year as a result of the initiation of the
distribution agreement with Dade. Imaging Product sales increased 3% to
$4,694,000 from the prior year. The gross profit margin for fiscal 1997
increased slightly to 19% from 18% in each of 1996 and 1995.
The Company's research and development expenses relate primarily to its
TAS products. Research and development expenses for 1997 were $2.6 million, a
12% increase from 1996, primarily due to increased clinical trial expenses
related to collaborations for new test card products.
The Company's general and administrative expenses in 1997 were $3.6
million, an increase of $661,000, or 23%, from 1996. Principal factors
contributing to the increase were legal expenses, additional staffing and
recruiting expenses, and increased facility expenses, including rent,
depreciation and consulting related to equipment upgrades.
Other income includes net interest income, grant revenue and development
income. Interest income decreased significantly in 1997 compared to 1996 due to
smaller cash balances during 1997 as funds were used for operations.
Development income increased to $825,000 in 1997 from $0 in 1996 as milestones
were achieved under collaborative agreements entered into in 1996 and 1997.
Sales and marketing expenses in 1997 of $1.3 million decreased
approximately $548,000 from 1996, primarily due to the reduction of the
Company's sales force in September 1996 after the Dade distribution agreement
was signed.
The net loss for the year ended December 31, 1997 was $4.7 million, or
$0.70 per share, compared to $5.1 million, or $0.78 per share, in 1996. The
decreased loss resulted primarily from increased sales and increased
development income from collaborations, partially offset by higher operating
expenses, as well as lower interest income because of smaller cash balances
during the year.
YEAR ENDED DECEMBER 31, 1996 VS. YEAR ENDED DECEMBER 31, 1995. Sales for
the year ended December 31, 1996 increased 23% to $6.4 million compared to a
year earlier. The $1.2 million increase in sales was attributable to an
increase in test card revenues of $600,000 and an increase in other TAS product
revenues of $600,000. Imaging Product sales were $4,581,000, essentially
unchanged from the prior year. The gross profit margin for fiscal 1996 was 18%,
unchanged from fiscal 1995. TAS analyzer sales in fiscal 1996 totaled 395 (214
analyzers in the U.S. and 181 in Europe).
28
<PAGE>
The Company's research and development expenses relate primarily to its
TAS products. Research and development expenses for 1996 were $2.3 million, or
28% greater than 1995, due to increased clinical trials expenses for expansion
of the TAS test card menu. The research and development expenses for fiscal
year 1995 were slightly less than fiscal 1994 as a result of the redirection of
the Company from the development stage to commercialization.
The Company's general and administration expenses rose $742,000, or 34%,
from fiscal 1995 to fiscal 1996. Principal factors contributing to the increase
were additional staffing, the full year effect of public company related
expenses, such as investor relations and director and officer liability
insurance, and an 11,000 square feet increase of facility space. In fiscal 1995
the Company's general and administrative expenses increased 52% from fiscal
1994. Unearned compensation related to the vesting of options upon the
consummation of the initial public offering in December 1995 accounted for
$383,000 or 51% of this increase. Staffing and associated office expenses for
the Amsterdam facility and an increase in allowance for doubtful accounts
accounted for the balance of this year to year increase.
Sales and marketing expenses increased approximately $617,000 from fiscal
1995 to 1996. This increase reflected the addition of seven sales people and
the associated travel expenses, as well as increased marketing and advertising
expenses. The increase of approximately $825,000 from fiscal 1994 to fiscal
1995 was a result of staffing the European office, establishing a warranty
reserve for TAS products and associated travel expenses for the market launch
of TAS in 1995.
The net loss for the year ended December 31, 1996 was $5.1, million or
$0.78 per share, compared to a net loss of $4.0 million, or $0.74 per share, in
1995. The additional loss of $1.1 million was a result of increased operating
expenses from fiscal 1995 to fiscal 1996 of $1.8 million which was partially
offset by increased interest income of $523,000 and $223,000 of higher gross
profits.. The net loss for fiscal 1995 was $0.74 per share compared to a loss
of $0.35 per share in 1994. The $0.74 loss per share in 1995 was due to $0.60
per share of operating losses and $0.14 per share of charges for reserves and
compensation expense. In fiscal 1995, CVDI increased the allowance for doubtful
accounts as a result of delinquent foreign receivables and established a
reserve for obsolete inventory recognizing the one-year life for test cards.
In connection with its initial public offering, in fiscal 1995 the Company
recorded unearned compensation expense of $427,000, the amount by which the
deemed fair value of the Common Stock exceeded the exercise price of certain
options as of the date of grant. Such compensation is expensed as the options
vest. For the year ended December 31, 1995, $383,000 of such compensation was
expensed. The compensation expense for the years ended December 31, 1997 and
1996 was $11,000. The Company expects to continue to recognize the remaining
compensation expense at a rate of $11,000 per year in 1998 and 1999.
LIQUIDITY AND CAPITAL RESOURCES
Through November 1995, CVDI's operations were funded primarily through
private sales of equity securities, National Institutes of Health Small
Business Innovative Research ("NIH SBIR") grants, license fees, equipment lease
lines and profits from Coeur. In December 1995, the Company completed its
initial public offering ("IPO"), selling 2.2 million shares with net proceeds
to the Company of $17.7 million.
In December 1997 the Company obtained an equipment loan from Transamerica
Business Credit Corporation in the original principal amount of approximately
$3,000,000. See Note 8 to the Company's Notes to Consolidated Financial
Statements.
At December 31, 1997, CVDI had cash and cash equivalents and short-term
investments of $5.9 million and working capital of $8.8 million, as compared to
$8.7 million and $11.6 million, respectively, at December 31, 1996. The
decrease was primarily the result of funding current operations. From December
31, 1997 to June 30, 1998, cash and cash equivalents decreased $2,085,000. This
decrease was mainly due to the utilization of cash for operations, capital
expenditures of $366,000 and repayment of long-term debt of $236,000.
During 1997, 1996 and 1995, the Company used cash flow in operating
activities of $4.3 million, $6.6 million and $2.7 million, respectively. The
use of cash was primarily due to funding the net operating losses of the
Company during these years and also growth in the Company's receivables and
inventories due to increased revenues.
Net cash provided by investing activities was $4.4 million in 1997
compared to net cash used in 1996 and 1995 of $7.2 million and $2.5 million,
respectively. Cash provided by investing activities in 1997 was mainly
attributable to maturities of investments that were used to fund operating
activities and capital expenditures. The net cash used in investing activities
in 1996 was the result of purchasing short term investments from the proceeds
of the Company's IPO in December 1995. The 1995 cash used was primarily related
to capital expenditures as the Company prepared for increased sales of its
products.
29
<PAGE>
Capital expenditures for 1997 were $1.5 million compared to $1.4 million
in 1996 and $2.3 million in 1995. These capital expenditures were primarily for
additional automated TAS test card production equipment and leasehold
improvements.
Cash provided by financing activities was $3.0 million, $0.3 million and
$18.3 million in 1997, 1996 and 1995, respectively. Net cash provided by
financing activities for 1997 resulted primarily from proceeds of a $3.0
million working capital loan obtained in December 1997. The cash provided by
financing activities in 1996 and 1995 was primarily the result of proceeds from
the issuance of stock in connection with the Company's IPO. These inflows were
partially offset by payments for capital lease obligations incurred related to
equipment purchases.
The Company expects to incur additional operating losses during 1998. The
Company's working capital requirements will depend on many factors, primarily
the volume of subsequent orders of TAS products from distributors, including
Chiron Diagnostics. In addition, the Company expects to incur costs associated
with clinical trials for new test cards. The Company may acquire other
products, technologies or businesses that complement the Company's existing and
planned products, although the Company currently has no understanding,
commitment or agreement with respect to any such acquisitions. In addition, the
Company may consider a joint venture or the sale of manufacturing rights to
complete the commercialization of its routine anticoagulant monitoring tests.
Management believes that its existing capital resources and cash flows from
operations, including under its distribution agreement with Chiron Diagnostics,
will be adequate to satisfy its planned capital requirements through 1999. To
enhance liquidity in future years, the Company plans to consider external
sources of financing as needed. In addition to other debt financings such as a
working capital line of credit, the Company also plans to consider equity
financings such as a private placement, a secondary public offering of common
stock or additional equity infusions from collaborative partners.
YEAR 2000
Computers, software and microprocessors that use only two digits to
identify a year in a date field may be unable to process accurately certain
date-based information at or after the year 2000. This is commonly referred to
as the "Year 2000 issue". The Company is addressing the issue in several ways.
First, the Company has established a team to monitor product compliance and
believes that all Company products are Year 2000 compliant. Secondly, the
Company is in the process of seeking Year 2000 compliance certification from
its major suppliers and vendors related to their products and internal business
applications. Finally, the Company has established a team to coordinate Year
2000 compliance related to internal systems.
Many of the Company's systems use vendor-provided software and Year 2000
compliance is expected to be achieved through vendor-provided upgrades. For
other internal systems, testing will be completed internally to ensure Year
2000 compliance. As of September 30, 1998, the Company has completed its
assessment of Year 2000 compliance with respect to all of its own products,
none of its own internal systems and approximately 30% of its vendor-provided
systems and applications. The Company anticipates all of its systems will have
been assessed and updated through vendor provider upgrades or through
completion of internal testing prior to June 30, 1999. The Company does not
believe that the cost of its Year 2000 compliance program will be material to
its financial condition or results of operations. The Company does not believe
that its business will be materially adversely affected by the Year 2000 issue.
However, the Company continues to bear risk related to the Year 2000 and could
be materially adversely affected if significant customers or suppliers fail to
address the issue or if vendor upgrades are not provided to the Company as
required. In a worst case scenario, the Company could be forced to spend
significant resources and funds to find alternative providers of systems and
applications used by the Company. If completion of the Company's assessment of
vendor-provided systems reveals Year 2000 non-compliance, the Company's
contingency plan is to insist upon vendor compliance a reasonable time in
advance of Year 2000 and to pursue arrangements with other vendors.
FACTORS THAT MAY AFFECT FUTURE RESULTS
A number of uncertainties exist that may affect the Company's future
operating results and stock price, including: risks associated with development
of new tests, particularly specialty tests that rely on development, regulatory
approval, commercialization and market acceptance of collaborators' new drugs;
market acceptance of TAS; the Company's continuing losses and the resulting
potential need for additional capital in the future; managed care and
continuing market consolidation, which may result in price pressure,
particularly on routine tests; and FDA regulations and other regulatory
guidelines
30
<PAGE>
affecting the Company and/or its collaborators. The market price of the Common
Stock could be subject to significant fluctuations in response to variations in
the Company's quarterly operating results as well as other factors which may be
unrelated to the Company's performance. The stock market in recent years has
experienced extreme price and volume fluctuations that often have been
unrelated or disproportionate to the operating performance of and announcements
concerning public companies. Such broad fluctuations may adversely affect the
market price of the Company's Common Stock. Securities of issuers having
relatively limited capitalization or securities recently issued in an initial
public offering are particularly susceptible to volatility based on short-term
trading strategies of certain investors.
MANAGEMENT
Following are the current officers and directors of CVDI, who upon the
Effective Time will become the officers and directors of Holding Company:
<TABLE>
<CAPTION>
NAME AGE TITLE
- ---------------------------- ----- ---------------------------------------------
<S> <C> <C>
John P. Funkhouser 45 President, Chief Executive Officer and
Chairman of the Board of Directors
Dick D. Timmons 53 Vice President and Chief Operating Officer
Donald E. Mahan 51 Vice President, Research and Development
Michael D. Riddle 45 Vice President, Sales and Marketing
Peter J. Scott 49 Vice President, Quality Assurance and
Regulatory Affairs
Paul T. Storey 31 Director of Finance, Corporate Secretary and
Treasurer
William A. Hawkins 44 Director
Philip R. Tracy 56 Director
John K. Pirotte 48 Director
Stephen R. Puckett 46 Director
</TABLE>
John P. Funkhouser was elected President, Chief Executive Officer and a
director of the Company in October 1993 upon the Company's acquisition of
Coeur. In February 1998, Mr. Funkhouser was appointed Chairman of the Board of
Directors of the Company. Since February 1992, Mr. Funkhouser has also served
as President and Chief Executive Officer of Coeur. Before his employment with
Coeur, Mr. Funkhouser was a General Partner with Hillcrest Group, a venture
capital firm, and worked for over nine years in managing venture capital
portfolio companies. Mr. Funkhouser holds a B.A. from Princeton University and
an M.B.A. from the University of Virginia.
Dick D. Timmons II was elected Vice President and Chief Operating Officer
of the Company in January 1998. Since October 1997, Mr. Timmons had served as
Vice President of Manufacturing of the Company. Before joining the Company, Mr.
Timmons spent 22 years in operations and product development positions of
increasing responsibility, with the Diagnostic Products Division of Abbott
Laboratories and Johnson & Johnson. From 1994 until October 1997, he served as
Director of Operations at Direct Access Diagnostics, an HIV testing service,
and from 1988 until 1994, he was Director of Technology Transfer at Ortho
Diagnostics Systems, a medical diagnostic test company. Mr. Timmons holds a
B.S. in Industrial Engineering from Purdue University and an M.B.A. from Lake
Forest School of Management.
Donald E. Mahan, Ph.D. joined the Company as its Director of Research in
1995, and was appointed Vice President of Research and Development in March
1997. From 1986 until 1995, Dr. Mahan worked for Gene-Trak Systems, a
subsidiary of AMOCO Corp., most recently as Director of Systems Development.
Dr. Mahan holds a Ph.D. in Biochemistry from Oklahoma State University.
Michael D. Riddle joined the Company as its Vice President of Sales and
Marketing in January 1995. Prior to joining the Company, Mr. Riddle was
employed by American Home Products for more than five years in various
positions, most recently Vice President of Sales and Marketing for its
subsidiary, Sherwood Medical Devices. Mr. Riddle holds an A.I.M.L.T. from
Bromley College of Technology (Kent, United Kingdom).
Peter J. Scott joined the Company as its Vice President of Quality
Assurance and Regulatory Affairs in October 1997. Prior to joining the Company,
Mr. Scott was employed by Gaymar Industries Inc., a medical device company, for
five years as Director of Quality Assurance and Regulatory Affairs. Mr. Scott
holds a B.S. from Tusculum College and an M.B.A. from Mt. St. Mary's College,
and is a Certified ASQ Quality Engineer.
31
<PAGE>
Paul T. Storey was elected Treasurer and Secretary in February 1998. Since
December 1997, Mr. Storey has also served as Director of Finance of the
Company. Prior to joining the Company, Mr. Storey was employed for more than
eight years at KPMG Peat Marwick LLP, most recently as a senior manager. Mr.
Storey is a Certified Public Accountant and holds a B.A. in Accounting from
Furman University.
William A. Hawkins was elected a director of the Company in January 1995.
Since June 1998, Mr. Hawkins has been the President of Novoste Corporation, a
medical device company focused on the treatment of coronary artery disease.
From April 1997 until he joined Novoste Corporation, Mr. Hawkins served as a
Vice President at American Home Products Corporation, a pharmaceutical company.
From October 1995 until he joined American Home Products, Mr. Hawkins was
President of Ethicon Endo-Surgery, Inc., a medical device company that is a
subsidiary of Johnson & Johnson. From January 1995 to October 1995, Mr. Hawkins
served as Vice President in charge of U.S. operations of Guidant Corporation
and President of Devices for Vascular Intervention, a medical device company
and a subsidiary of Guidant. Prior to joining Guidant, Mr. Hawkins held several
positions with IVAC Corporation, most recently serving as President and Chief
Executive Officer from 1991 until 1995. Mr. Hawkins holds a B.S. in Engineering
and Biomedical Engineering from Duke University and an M.B.A. from the
University of Virginia.
John K. Pirotte has been Chairman and Chief Executive Officer of CORPEX
Technologies Incorporated, a privately held company that develops and markets
surface active chemical technology, since 1990. In addition, Mr. Pirotte has
operated a private investment company, was Chief Financial Officer from 1979 to
1981 and Chairman and Chief Executive Officer from 1981 until 1988 of The
Aviation Group, Inc., and served as a manager of Acquisition Advisory Services
for an international public accounting firm. He is a founding director of North
Carolina Enterprise Corp., a venture capital fund. Mr. Pirotte holds a B.A.
from Princeton University and an M.S. from New York University Graduate School
of Business Administration.
Stephen R. Puckett has served as Chairman of the Board of Directors and
President of MedCath Incorporated, a publicly held provider of cardiology and
cardiovascular services that he founded in 1988. He has also served as
Executive Vice President and Chief Operating Officer of the Charlotte
Mecklenburg Hospital Authority. Mr. Puckett holds a B.S. and an M.S. in Health
Management from the University of Alabama.
Philip R. Tracy was President and CEO of Burroughs Wellcome Co., the
United States subsidiary of Wellcome plc, a global pharmaceutical company, from
1989 until the acquisition of Wellcome by Glaxo plc in 1995. Prior to 1989, he
served in various legal capacities with Burroughs Wellcome, including Vice
President and General Counsel. He has served on the boards of Wellcome Plc, the
Pharmaceutical Research and Manufacturers of America, and the Non-Prescription
Drug Manufacturers Association. He is currently Of Counsel to the law firm of
Smith, Anderson, Blount, Dorsett, Mitchell & Jernigan, L.L.P. and serves on the
Board of SunPharm Corporation, a development stage pharmaceutical company. Mr.
Tracy holds a B.A. from the University of Nebraska and an L.L.B. from George
Washington University School of Law, and has attended the Senior Executive
Program at Stanford University.
32
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the ownership
of shares of the Company's Common Stock as of the Record Date by (i) each
person known by the Company to own beneficially more than 5% of the outstanding
shares of Common Stock, (ii) each current director of the Company, (iii) each
of the Company's President and four most highly compensated executive officers
other than the President whose cash compensation for the year ended December
31, 1997 exceeded $100,000 (collectively, the "Named Executive Officers"), and
(iv) all current directors and executive officers of the Company as a group.
Except as indicated in footnotes to this table, the persons named in this table
have sole voting and investment power with respect to all shares of Common
Stock indicated. Share ownership in each case includes shares issuable upon
exercise of outstanding options that may be exercised within 60 days after the
Record Date for purposes of computing the percentage of Common Stock owned by
such person but not for purposes of computing the percentage owned by any other
person.
<TABLE>
<CAPTION>
SHARES PERCENTAGE
NAME BENEFICIALLY OWNED OWNED (1)
- -------------------------------------------------- -------------------- -----------
<S> <C> <C>
Chiron Diagnostics Corporation ................ 600,000 8.1%
63 North Street
Medfield, Massachusetts 02052
Davenport & Co................................. 426,035(2) 5.7
901 E. Cary Street, Suite 1100
Richmond, Virginia 23219
The Capital Group Companies, Inc............... 412,500(3) 5.5
333 South Hope Street
Los Angeles, California 90071
John P. Funkhouser ............................ 288,748(4) 3.7
Jonathon M. Lawrie, Ph.D....................... 84,476 1.1
Michael D. Riddle ............................. 44,622(4) *
Wayne J. Scroggins ............................ 16,300 *
Donald E. Mahan, Ph.D.......................... 18,750(5) *
William A. Hawkins ............................ 6,899(6) *
Stephen R. Puckett ............................ 6,000(7) *
John K. Pirotte ............................... 5,000(7) *
Philip R. Tracy ............................... 5,000(7) *
All current executive officers and directors
as a group (10 persons) ..................... 400,019(8) 5.1
</TABLE>
- ---------
* Less than one percent.
(1) As of the Record Date, the Company had 7,436,724 shares of Common Stock
outstanding.
(2) As reported in the Schedule 13G dated January 23, 1998 filed with the
Securities and Exchange Commission by Davenport & Company LLC, consists of
shares held by individuals who are customers, or representatives (or
members of a representatives' immediate family), of Davenport & Company
LLC, which disclaims beneficial ownership.
(3) As reported in the Amendment No. 2 to Schedule 13G dated July 9, 1998 filed
with Securities and Exchange Commission by The Capital Group Companies,
Inc. ("Capital Group"), these shares are held by SMALLCAP World Fund,
Inc., an investment company ("SMALLCAP"), and may be deemed to be
beneficially owned by SMALLCAP's investment adviser, Capital Research and
Management Company, and by the latter's parent, Capital Group, which
disclaims beneficial ownership.
(4) Consists solely of shares underlying options.
(5) Includes 18,550 shares underlying options.
(6) Includes 3,899 shares underlying options.
(7) Includes 2,000 shares underlying options.
(8) Includes shares referenced in footnotes (4) through (7).
33
<PAGE>
COMPENSATION OF EXECUTIVE OFFICERS
SUMMARY COMPENSATION.
The following table reflects all cash and noncash compensation paid by the
Company to the Named Executive Officers for their services in all capacities
during the years ended December 31, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
---------------------------- -------------
OPTIONS/ ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS SARS COMPENSATION
- --------------------------- ------ ----------- --------- ------------- ----------------
<S> <C> <C> <C> <C> <C>
John P. Funkhouser 1997 $185,000 $ -- 30,000 $ 37,900(1)
President, Chief Executive Office 1996 185,000 -- -- --
1995 150,000 40,000 56,648 --
Michael D. Riddle 1997 125,000 10,000 5,000 --
Vice President 1996 125,000 -- -- --
Sales and Marketing 1995 125,000 5,000 51,499 --
Wayne Scroggins(2) 1997 117,000 -- 25,000 --
Chief Operating Officer 1996 92,000 -- 50,000 --
Jonathon M. Lawrie, Ph.D.(3) 1997 108,000 -- -- 14,100(4)
Managing Director, Europe 1996 130,000 -- -- 19,905(5)
and Chief Scientific Officer 1995 130,000 10,000 27,631 29,100(6)
Donald E. Mahan, Ph.D. 1997 114,000 -- 30,000 --
Vice President
Research & Development
</TABLE>
- ---------
(1) Consists of club initiation fees.
(2) Mr. Scroggins' employment by the Company terminated in June 1997.
(3) Dr. Lawrie's employment by the Company terminated in October 1997.
(4) Consists of foreign living allowance of $6,400 and moving expenses of
$7,700.
(5) Consists of foreign living allowance of $17,900 and family travel allowance
of $2,000.
(6) Consists of foreign living allowance.
OPTION GRANTS, EXERCISES AND HOLDINGS AND FISCAL YEAR-END OPTION VALUES.
The following table summarizes all option grants during the year ended
December 31, 1997 to the Named Executive Officers.
OPTION GRANTS DURING YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
NUMBER OF % OF TOTAL STOCK PRICE
SHARES OPTIONS EXERCISE APPRECIATION FOR
UNDERLYING GRANTED TO OR BASE OPTION TERM (2)
OPTIONS EMPLOYEES PRICE PER EXPIRATION ----------------------
NAME GRANTED IN 1997 SHARE (1) DATE 5% 10%
- ---- --------------- ------------ ----------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
John P. Funkhouser ............ 30,000(3) 9.3% $ 5.00 Dec.-07 $94,300 $239,100
Michael D. Riddle ............. 5,000(4) 1.5% $ 3.75 Jan.-07 11,800 29,900
Wayne J. Scroggins ............ 25,000(4) 7.7% $ 3.75 Jan.-07 59,000 149,400
Donald E. Mahan, Ph.D.......... 25,000(4) 7.7% $ 3.75 Jan.-07 59,000 149,400
5,000(3) 1.5% $ 5.00 Dec.-07 15,700 39,800
</TABLE>
- ---------
(1) The exercise price may be paid in cash, in shares of Common Stock with a
market value as of the date of exercise equal to the option price or a
combination of cash and shares of Common Stock.
(2) The compounding assumes a 10-year exercise period for all option grants.
These amounts represent certain assumed rates of appreciation only. Actual
gains, if any, on stock option exercises are dependent on the future
performance of the Common Stock, and overall stock market conditions. The
amounts reflected in this table may not necessarily be achieved.
(3) This grant was made in December 1997 and becomes exercisable over four
years from the date of grant, based on continued employment with the
Company. To the extent not already exercisable, the options become fully
vested by their terms upon the consummation of a merger in which the
Company is not the surviving corporation, a transfer of all of the
Company's stock, a sale of substantially all of the Company's assets or a
dissolution or liquidation of the Company, unless the successor
corporation assumes the outstanding options or substitutes substantially
equivalent options.
(4) This grant was made in January 1997 and becomes exercisable over four years
from the date of grant, based on continued employment with the Company. To
the extent not already exercisable, the options become fully vested by
their terms upon the consummation of a merger in which the Company is not
the surviving corporation, a transfer of all of the Company's stock, a
sale of substantially all of the Company's assets or a dissolution or
liquidation of the Company, unless the successor corporation assumes the
outstanding options or substitutes substantially equivalent options.
34
<PAGE>
The following table sets forth information concerning all option exercises
during the year ended December 31, 1997 and option holdings as of December 31,
1997, by the Named Executive Officers.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
SHARES DECEMBER 31, 1997 DECEMBER 31, 1997(1)
ACQUIRED ON VALUE ----------------------------------- ----------------------------------
NAME EXERCISE REALIZED(2) EXERCISABLE(3) UNEXERCISABLE(3) EXERCISABLE(3) UNEXERCISABLE(3)
- ------------------------------- ------------- ------------ ---------------- ------------------ ---------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
John P. Funkhouser ............ -- -- 267,086 58,324 $1,820,600 $ 89,100
Michael D. Riddle ............. -- -- 35,244 21,257 229,000 113,400
Wayne J. Scroggins ............ 12,500 54,688 -- -- -- --
Jonathon M. Lawrie, Ph.D. ..... 6,909 11,227 -- -- -- --
Donald E. Mahan, Ph.D. ........ -- -- 7,500 37,500 26,250 147,500
</TABLE>
- ---------
(1) Calculated by subtracting the exercise price from $8.00, the closing price
of the Company's Common Stock as reported by the Nasdaq National Market on
December 31, 1997, the last business day of the fiscal year ended December
31, 1997, and multiplying the difference by the number of shares
underlying each option.
(2) Market value of the underlying Common Stock as of the date of exercise,
minus the exercise price.
(3) The first number represents the number or value (as called for by the
appropriate column) of exercisable options; the second number represents
the number or value (as appropriate) of unexercisable options.
COMPENSATION OF DIRECTORS
Each of the Company's non-employee directors receives $2,500 per year,
$1,000 per Board meeting and annual Company strategy meeting, and $500 per
Committee meeting, that he or she attends. In addition, each non-employee
director receives a fully vested option to purchase 1,000 shares of Common
Stock upon election or re-election to the Board. All directors are reimbursed
by the Company for expenses incurred to attend Board meetings.
REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION
The Compensation Committee of the Board of Directors (the "Committee"),
consisting entirely of non-employee directors, approves all policies under
which compensation is paid or awarded to the Company's executive officers. The
Committee is currently composed of Messrs. Pirotte and Puckett. The Committee
also administers the Company's stock plans.
Neither the material in this report nor the performance graph included in
this proxy statement under the heading " -- Performance Graph" (the
"Performance Graph") is soliciting material, is or will be deemed filed with
the Securities and Exchange Commission or is or will be incorporated by
reference in any filing of the Company under the Securities Act of 1933, as
amended, or the Exchange Act, whether made before or after the date of this
proxy statement and irrespective of any general incorporation language in such
filing.
COMPENSATION PHILOSOPHY. The Company's executive compensation program has
three objectives: (1) to align the interests of the executive officers with the
interests of the Company's shareholders by basing a significant portion of an
executive's compensation on the Company's performance; (2) to attract and
retain highly talented and productive executives; and (3) to provide incentives
for superior performance by the Company's executives. To achieve these
objectives, the Committee has crafted a program that consists of base salary,
short-term incentive compensation in the form of cash bonuses and long-term
incentive compensation in the form of stock and stock options. These
compensation elements are in addition to the general benefits programs which
are offered to all of the Company's employees.
Each year, the Committee reviews the Company's executive compensation
program. In its review, the Committee uses compensation survey data prepared by
Coopers to study the compensation packages for executives of companies at a
comparable stage of development and in the Company's geographic area. The
Committee assesses the competitiveness of the Company's executive compensation
program and reviews the Company's financial and operational performance for the
previous fiscal year. The Committee also gauges the success of the compensation
program in achieving its objectives in the previous year and considers the
Company's overall performance objectives. For compensation paid to the Chief
Executive Officer and other Named Executive Officers in 1997, no reference was
made to the data for comparable companies included in the Performance Graph.
Each element of the Company's executive compensation program is discussed
below.
35
<PAGE>
BASE SALARIES. The Committee annually reviews the base salaries of the
Company's executive officers. The base salaries for the Company's executive
officers for fiscal 1997 were established by the Committee at the beginning of
that fiscal year. In addition to considering the factors listed in the
foregoing section that support the Company's executive compensation program
generally, the Committee reviews the responsibilities of the specific executive
position and the experience and knowledge of the individual in that position.
The Committee also measures individual performance based upon a number of
factors, including a measurement of the Company's historic and recent financial
and operational performance and the individual's contribution to that
performance, the individual's performance on non-financial goals and other
contributions of the individual to the Company's success, and gives each of
these factors relatively equal weight without confining its analysis to a
rigorous formula. As is typical of most corporations, the actual payment of
base salary is not conditioned upon the achievement of any predetermined
performance targets.
INCENTIVE COMPENSATION. Cash bonuses established for executive officers
are intended to motivate the individual to work hard to achieve the Company's
financial and operational performance goals or to otherwise incent the
individual to aim for a high level of achievement on behalf of the Company in
the coming year. Because it had been in the early stages of development, the
Company did not pay cash bonuses prior to fiscal 1995. In 1997, the Company
paid a cash bonus of $10,000 to Mr. Riddle. This bonus was paid based on
achievement of certain of the strategic goals established early in the year,
primarily those related to the Company's marketing strategy.
LONG-TERM INCENTIVE COMPENSATION. The Company's long-term incentive
compensation plan for its executive officers is based upon the Company's stock
plans. The Company believes that placing a portion of its executives' total
compensation in the form of stock or stock options achieves three objectives.
It aligns the interest of the Company's executives directly with those of the
Company's shareholders, gives executives a significant long-term interest in
the Company's success and helps the Company retain key executives. Options
generally vest over four years based on continued employment. In determining
the number of options to grant an executive, the Board primarily considered the
executive's past performance and the degree to which an incentive for long-term
performance would benefit the Company, as well as the number of shares and
options already held by the executive officer. It is the Committee's policy to
grant options at fair market value unless particular circumstances warrant
otherwise.
BENEFITS. The Company believes that it must offer a competitive benefits
program to attract and retain key executives. During fiscal 1997, the Company
provided the same medical and other benefits to its executive officers that are
generally available to its other employees.
COMPENSATION OF THE CHIEF EXECUTIVE OFFICER. The Chief Executive Officer's
compensation is based on the same elements and measures of performance as is
the compensation for the Company's other executive officers. The Committee
approved a base salary for Mr. Funkhouser for fiscal 1997 of $185,000 based on
the same factors as were considered in determining the base salaries of the
other executive officers.
SECTION 162(M) OF THE CODE. It is the responsibility of the Committee to
address the issues raised by Section 162(m) of the Code. Revisions to this
Section made certain non-performance based compensation in excess of $1,000,000
to executives of public companies non-deductible to the companies beginning in
1994. The Committee has reviewed these issues and has determined that it is not
necessary for the Company to take any action at this time with regard to these
issues.
Submitted by: THE COMPENSATION COMMITTEE
John K. Pirotte
Stephen R. Puckett
36
<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Compensation Committee are currently Messrs. Pirotte
and Puckett. Messrs. Pirotte and Puckett were not at any time during the fiscal
year ended December 31, 1997 or at any other time an officer or employee of the
Company. No executive officer of the Company serves as a member of 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.
COMPARISON OF CUMULATIVE TOTAL RETURN (1)
(Performance Graph appears here. See table below for plot points.)
<TABLE>
<CAPTION>
12/95 3/96 6/96 9/96 12/96 3/97 6/97 9/97 12/97
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NASDAQ 100 104.66 113.21 117.23 122.99 116.32 137.65 160.94 150.83
PEER GROUP--NON-FIN 100 105.04 114.29 117.18 121.52 113.34 134.33 157.37 142.6
PEER GROUP--PHARMA 100 104.04 101.05 103.38 100.29 95.24 102.82 115.38 103.64
CVDI 100 104.55 77.27 61.36 35.28 45.45 68.18 81.82 72.73
</TABLE>
- ---------
(1) Assumes $100 invested on December 11, 1995 (the effective date of the
Company's initial public offering) in each of the Company's Common Stock,
the Nasdaq CRSP Total Market Return Index, the Nasdaq Non-Financial Stocks
Total Return Index (the "Non-Financial Index") and the Nasdaq
Pharmaceutical Stocks Total Return Index (the "Pharmaceutical Index"). The
Company has previously used the Non-Financial Index as its published
industry or line-of-business index for comparison purposes. The Company
intends to use the Pharmaceutical Index for such purposes in the future,
because the Non-Financial Index includes companies in industries that are
unrelated to the Company's business. Total return assumes reinvestment of
dividends.
CERTAIN TRANSACTIONS
In August 1998, the Company entered into a Common Stock Purchase Agreement
with Chiron Diagnostics, pursuant to which the Company issued and sold to
Chiron Diagnostics an aggregate of 600,000 shares of its Common Stock in
exchange for $6,000,000 cash, or $10.00 per share. The Common Stock Purchase
Agreement provides, among other things, that Chiron Diagnostics will not
acquire more than 20% of the Company's voting securities, except where a third
party accumulates or attempts to buy specified percentages of the Company's
voting stock. Except under limited circumstances, Chiron Diagnostics cannot
transfer its shares to an unaffiliated person unless the Company is first
offered the right to purchase such shares. Except with respect to certain
significant events (including a sale or dissolution of the Company), Chiron
Diagnostics also agreed to vote its shares in accordance with the
recommendation of the Company's Board or in not less than the proportion as the
votes cast by other shareholders. In addition, the Company agreed to include in
the slate of nominees recommended by the Company for election as directors of
the Company at the next meeting of shareholders at which directors are to be
elected, one person designated by Chiron Diagnostics and reasonably acceptable
to the Company. The Company also granted to Chiron Diagnostics registration
rights with respect to the purchased shares and the right to receive
notification of and to make a competing bid with respect to certain change of
control transactions. In the event of a change in control transaction at less
than $10.00 per share, the Company must pay Chiron Diagnostics the difference
between $10.00 and the price per share in the transaction, unless Chiron
Diagnostics has failed to meet its minimum purchase requirements under the
Distribution Agreement between them. See "Information Relating to CVDI -- Sales
and Marketing."
37
<PAGE>
MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
(a) Price Range of Common Stock
The Company's Common stock trades on the Nasdaq National Market under the
symbol "CVDI". The following sets forth the quarterly high and low sales prices
for the fiscal quarters indicated as reported by Nasdaq. These prices are based
on quotations between dealers, which do not reflect retail mark-up, mark-down
or commissions, and do not necessarily represent actual transactions.
<TABLE>
<CAPTION>
HIGH LOW
---------- ----------
<S> <C> <C>
Fiscal Year Ended December 31, 1996
January 1, 1996 through March 31, 1996 ....................... $ 11 5/8 $ 9 1/2
April 1, 1996 through June 30, 1996 .......................... 11 1/2 7 1/2
July 1, 1996 through September 30, 1996 ...................... 8 1/4 4 1/4
October 1, 1996 through December 31, 1996 .................... 6 3/4 3 3/4
Fiscal Year Ended December 31, 1997
January 1, 1997 through March 31, 1997 ....................... $ 5 3/4 $ 3 1/2
April 1, 1997 through June 30, 1997 .......................... 8 1/4 4 5/8
July 1, 1997 through September 30, 1997 ...................... 9 3/8 5 3/4
October 1, 1997 through December 31, 1997 .................... 9 1/8 4 1/2
Fiscal Year Ending December 31, 1998
January 1998 through March 31, 1998 .......................... $ 9 $ 6
April 1, 1998 through June 30, 1998 .......................... 8 5/8 4 15/16
July 1, 1998 through September 30, 1998 ...................... 7 3/4 4 7/8
October 1, 1998 through October 21, 1998 ..................... 5 3/8 3 1/2
</TABLE>
(b) Approximate Number of Equity Security Holders
As of June 30, 1998, the number of record holders of the Company's Common
Stock was approximately 200, and the Company believes that the number of
beneficial owners was approximately 1,800.
(c) Dividends
Neither CVDI nor Holding Company has ever paid a cash dividend on its
Common Stock and anticipates that for the foreseeable future any earnings will
be retained for use in its business and, accordingly, neither company
anticipates the payment of cash dividends.
PROPOSAL NO. 2 -- APPROVAL OF AMENDMENT TO THE 1995 STOCK PLAN
GENERAL
The Company's 1995 Stock Plan (the "1995 Plan") was adopted by the Board
of Directors in September 1995 and approved by the shareholders in November
1995. The 1995 Plan authorizes for issuance a maximum of 838,150 shares of
Common Stock, 350,000 of which are subject to shareholder approval at the
Meeting. As of June 30, 1998, without giving effect to the proposed amendment,
354,320 shares had either been issued under the 1995 Plan or were subject to
outstanding options thereunder and 133,830 shares remained available for future
grant thereunder, which the Board of Directors believes is insufficient to meet
the Company's anticipated needs with respect to the issuance of additional
options to employees (including new hires), consultants and directors of the
Company.
The 1995 Plan provides for grants of options to employees, consultants and
directors of the Company and its affiliates. It also allows for the grant of
stock bonuses and purchase rights, but no purchase rights have been granted to
date. As of June 30, 1998, approximately 85 persons were eligible to receive
grants under the 1995 Plan. Each stock option granted under the 1995 Plan is
evidenced by a written stock option agreement between the Company and the
optionee. The acceptable methods of payment for shares issued upon exercise of
an option consist of cash, check, and, in the discretion of the Board of
Directors, by promissory note, net exercise or any combination of the
foregoing. The Company has full recourse with respect to any promissory note
given by an optionee. The exercise price of options granted under the 1995 Plan
is determined on the date of grant, and in the case of incentive stock options
(within the meaning of Section 422 of the Code) must be at least 100% of the
fair market value at the time of grant. As of June 30, 1998, the fair market
value of the Company's Common Stock, as quoted on the Nasdaq Stock Market, was
$5.75 per share.
At the time an option is granted, the Board (or its committee) determines
the period within which the option may be exercised. Options granted to
employees under the 1995 Plan generally become exercisable in increments, based
on the
38
<PAGE>
optionee's continued employment with the Company, over a period of four years.
The form of option agreement generally provides that options granted under the
1995 Plan expire ten years from the date of grant. Options granted pursuant to
the 1995 Plan are not transferable by the optionee, other than by will or the
laws of descent and distribution, and are exercisable during the optionee's
lifetime only by the optionee.
The 1995 Plan may be administered by the Board of Directors of the Company
or a committee of directors designated by the Board. The Compensation Committee
currently administers the 1995 Plan. The Board or Committee may amend the 1995
Plan at any time or from time to time or may terminate the 1995 Plan without
the approval of the shareholders, provided that shareholder approval is
required for any amendment to the 1995 Plan requiring shareholder approval
under applicable law as in effect at the time. However, no action by the Board
of Directors, Committee or shareholders may alter or impair any option
previously granted under the 1995 Plan. The Board or Committee may accelerate
the exercisability of any option or waive any condition or restriction
pertaining to such option at any time. The 1995 Plan will terminate in
September 2005, unless terminated sooner by the Board or Committee.
TAX CONSEQUENCES OF OPTIONS
An optionee who is granted an incentive stock option will generally not
recognize taxable income either at the time the option is granted or upon its
exercise, although the exercise may subject the optionee to the alternative
minimum tax. Effective for taxable years ending after 1997, upon the sale or
exchange of the shares more than two years after grant of the option and more
than one year after exercising the option, any gain or loss upon disposition
will be treated as long-term capital gain or loss. If these holding periods are
not satisfied, the optionee will recognize ordinary income at the time of sale
or exchange equal to the difference between the exercise price and the lower of
the fair market value of the shares at the date of the option exercise or the
sale price of the shares. The Company will be entitled to a deduction in the
same amount as the ordinary income, if any, recognized by the optionee. Any
gain or loss recognized on such a premature disposition of the shares in excess
of the amount treated as ordinary income will be characterized as long-term or
short-term capital gain or loss, depending on the holding period.
All other options which do not qualify as incentive stock options are
referred to as nonstatutory options. Generally, an optionee will not recognize
any taxable income at the time he or she is granted a nonstatutory option.
However, upon its exercise, the optionee will recognize taxable income
generally measured as the excess of the then fair market value of the shares
purchased over the purchase price. Any taxable income recognized in connection
with exercise of such option by an optionee who is also an employee of the
Company will be subject to tax withholding by the Company. The Company will be
entitled to a tax deduction in the same amount as the ordinary income
recognized by the optionee with respect to shares acquired upon exercise of a
nonstatutory option. Upon resale of such shares by the optionee, any difference
between the sales price and the optionee's purchase price, to the extent not
recognized as taxable income as described above, will be treated as long-term
or short-term capital gain or loss, depending on the holding period.
The foregoing is only a summary, based on the Code as currently in effect,
of the effect of federal income taxation upon the optionee and the Company with
respect to the grant and exercise of options under the 1995 Plan, does not
purport to be complete, and does not discuss the tax consequences of the
optionee's death or the income tax laws of any municipality, state or foreign
country in which an optionee may reside.
PROPOSED AMENDMENT
On July 21, 1998, the Board of Directors adopted an amendment to the 1995
Plan increasing the number of shares reserved for issuance thereunder by
350,000. Prior to this amendment, a total of only 133,830 shares remained
available for future grant under the 1995 Plan, which the Board of Directors
believes is insufficient to meet the Company's anticipated needs with respect
to the issuance of additional options to employees (including new hires),
consultants and directors of the Company.
At the Meeting, the shareholders are being asked to approve the
above-described amendment to the 1995 Plan increasing the number of shares
authorized for issuance thereunder by 350,000 shares.
VOTE REQUIRED
The affirmative vote of the holders of a majority of the shares of the
Company's Common Stock present or represented by proxy and voting on this
proposal at the Meeting will be required to approve the amendment to the 1995
Plan.
THE BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED AND RECOMMENDS A VOTE
"FOR" THE PROPOSED AMENDMENT TO THE 1995 PLAN.
39
<PAGE>
SOLICITATION OF PROXIES
In addition to solicitation by mail, officers, directors and employees of
CVDI may, without additional compensation, solicit Proxies from CVDI
shareholders in person or by telephone. Any expenses of such solicitation will
be borne by CVDI.
DEADLINE FOR SHAREHOLDER PROPOSALS
Shareholders having proposals they desire to present at the first annual
meeting of shareholders of Holding Company should, if they desire that such
proposals be included in Holding Company's Proxy Statement relating to such
meeting, submit such proposals in time to be received by Holding Company at its
principal executive office in Raleigh, North Carolina, not later than December
10, 1998. To be so included, all such submissions must comply with the
requirements of Rule 14a-8 promulgated under the Exchange Act and the Board of
Directors directs the close attention of interested shareholders to the Rule.
Proposals may be mailed to Secretary, PharmaNetics, Inc., 5301 Departure Drive,
Raleigh, North Carolina 27616.
LEGAL MATTERS
Certain legal matters in connection with the Reorganization Shares offered
hereby will be passed upon for Holding Company by Wyrick Robbins Yates & Ponton
LLP, Raleigh, North Carolina.
EXPERTS
The consolidated balance sheets of Cardiovascular Diagnostics, Inc. and
subsidiaries as of December 31, 1997 and 1996 and the consolidated statements
of operations, shareholders' equity and cash flows for each of the three years
in the period ended December 31, 1997, included in this Proxy
Statement/Prospectus, have been included herein in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on authority of that
firm as experts in accounting and auditing.
OTHER MATTERS
CVDI is not aware of any other matters that will be presented for action
at the Meeting. However, if any other matters properly come before the Meeting,
the persons named in the accompanying Proxy intend to exercise the discretion
conferred by the Proxy to vote in accordance with their judgment on such
matters.
40
<PAGE>
CARDIOVASCULAR DIAGNOSTICS, INC.
AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PAGE(S)
--------
<S> <C>
Consolidated Financial Statements:
Report of Independent Accountants ................................................................. F-2
Consolidated Balance Sheets as of December 31, 1997 and 1996 ...................................... F-3
Consolidated Statements of Operations for the years ended December 31, 1997, 1996 and 1995 ........ F-4
Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 1997, 1996
and 1995 ......................................................................................... F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and
1995 ............................................................................................. F-6
Notes to Consolidated Financial Statements ........................................................ F-7
Consolidated Balance Sheets as of June 30, 1998 (unaudited) and December 31, 1997 ................. F-17
Consolidated Statements of Operations and Comprehensive Loss for the Three Months and Six
Months Ended June 30, 1998 and 1997 (unaudited) .................................................. F-18
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 1998 and 1997
(unaudited) ...................................................................................... F-19
Notes to Unaudited Consolidated Financial Statement ............................................... F-20
Consolidated Financial Statement Schedule:
Report of Independent Accountants ................................................................. F-22
Schedule II -- Valuation and Qualifying Accounts for the Years Ended December 31, 1997, 1996
and 1995 ......................................................................................... F-23
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
THE BOARD OF DIRECTORS AND SHAREHOLDERS
CARDIOVASCULAR DIAGNOSTICS, INC.
We have audited the accompanying consolidated balance sheets of
Cardiovascular Diagnostics, Inc. and subsidiaries as of December 31, 1997 and
1996, and the related consolidated statements of operations, shareholders'
equity and cash flows for each of the three years in the period ended December
31, 1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Cardiovascular
Diagnostics, Inc. and subsidiaries as of December 31, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997 in conformity with generally
accepted accounting principles.
/s/ PRICEWATERHOUSECOOPERS LLP
Raleigh, North Carolina
February 12, 1998
F-2
<PAGE>
CARDIOVASCULAR DIAGNOSTICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
---------------- ----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .............................................................. $ 5,884,522 $ 2,716,242
Short term investments, held-to-maturity ............................................... -- 5,973,405
Receivables:
Trade, net of allowance for doubtful accounts of $3,792 in 1997 and $5,000 in
1996 ................................................................................. 1,629,499 906,491
Other .................................................................................. 258,213 385,073
------------- -------------
Total Receivables .................................................................... 1,887,712 1,291,564
Inventories ............................................................................ 2,998,052 2,018,798
Other current assets ................................................................... 216,808 198,111
------------- -------------
Total current assets ................................................................. 10,987,094 12,198,120
Property and equipment, net .............................................................. 4,938,125 4,236,128
Intangible assets, net ................................................................... 1,568,095 1,700,560
Other noncurrent assets .................................................................. 191,189 216,547
------------- -------------
$ 17,684,503 $ 18,351,355
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ....................................................................... $ 1,137,676 $ 377,314
Accrued expenses ....................................................................... 463,884 219,634
Current portion of long-term debt ...................................................... 533,218 --
Current portion of capital lease obligations ........................................... 5,842 19,082
------------- -------------
Total current liabilities ............................................................ 2,140,620 616,030
------------- -------------
Long-term debt, less current portion ..................................................... 2,350,155 50,000
Capital lease obligations, less current portion .......................................... 1,020 16,987
------------- -------------
Total noncurrent liabilities ......................................................... 2,351,175 66,987
------------- -------------
Total liabilities .................................................................... 4,491,795 683,017
------------- -------------
Shareholders' equity:
Preferred stock, $.001 par value; authorized 1,000,000 shares Series A participating
preferred stock, voting; no shares issued or outstanding at December 31, 1997 and
1996 ..................................................................................
Common stock, $.001 par value; authorized 10,000,000 shares; 6,750,518 and
6,663,986 issued and outstanding at December 31, 1997 and 1996, respectively .......... 6,750 6,664
Additional paid-in capital ............................................................. 33,826,747 33,682,330
Cumulative translation adjustments ..................................................... -- (48,078)
Accumulated deficit .................................................................... (20,618,789) (15,939,578)
Unearned compensation .................................................................. (22,000) (33,000)
------------- -------------
Total shareholders' equity ........................................................... 13,192,708 17,668,338
------------- -------------
$ 17,684,503 $ 18,351,355
============= =============
Commitments and contingencies (Notes 9, 14 and 15)
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE>
CARDIOVASCULAR DIAGNOSTICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
--------------- --------------- ---------------
<S> <C> <C> <C>
Net sales ....................................... $ 7,618,473 $ 6,411,519 $ 5,198,950
Cost of sales:
Materials and labor ........................... 3,961,772 3,121,439 2,744,932
Overhead ...................................... 2,207,340 2,135,605 1,523,296
------------ ------------ ------------
Total cost of sales .......................... 6,169,112 5,257,044 4,268,228
------------ ------------ ------------
Gross profit ................................ 1,449,361 1,154,475 930,722
------------ ------------ ------------
Operating expenses:
General and administrative .................... 3,594,158 2,933,016 2,191,036
Sales and marketing ........................... 1,347,309 1,895,492 1,278,139
Research and development ...................... 2,572,649 2,300,462 1,800,936
------------ ------------ ------------
Total operating expenses ..................... 7,514,116 7,128,970 5,270,111
------------ ------------ ------------
Loss from operations ......................... (6,064,755) (5,974,495) (4,339,389)
------------ ------------ ------------
Other income (expense):
Interest expense .............................. (1,638) (16,317) (59,550)
Interest income ............................... 335,403 634,989 111,536
Grant income .................................. 278,121 254,204 292,534
Development income ............................ 825,000 -- --
License fee and royalty income ................ 30,741 32,835 124,772
------------ ------------ ------------
Other income, net ............................ 1,467,627 905,711 469,292
------------ ------------ ------------
Loss before income taxes ..................... (4,597,128) (5,068,784) (3,870,097)
Provision for income taxes ...................... (82,083) (51,860) (82,136)
------------ ------------ ------------
Net loss ..................................... $ (4,679,211) $ (5,120,644) $ (3,952,233)
============ ============ ============
Basic and diluted loss per common share ......... $ (0.70) $ (0.78) $ (0.74)
============ ============ ============
Weighted average number of common shares ........ 6,722,491 6,566,134 5,323,239
============ ============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE>
CARDIOVASCULAR DIAGNOSTICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
SERIES A ADDITIONAL
PARTICIPATING COMMON PAID-IN
PREFERRED STOCK STOCK CAPITAL
----------------- ---------- ---------------
<S> <C> <C> <C>
Balances at December 31, 1994 ......... $ 482 $ 3,456 $ 14,291,171
Issuance of 210,900 shares of
Series A preferred stock at $6.25
per share, net of issuance costs ..... 211 1,278,595
Issuance of 3,671 shares of common
stock at $0.59 per share ............. 4 2,171
Issuance of 1,265 shares of common
stock at $0.5056 per share ........... 1 639
Issuance of 15,189 shares of common
stock at $0.3950 per share ........... 15 5,985
Unearned compensation related to
common stock options ................. 426,638
Amortization of unearned
compensation .........................
Conversion of 693,272 shares of
Series A preferred stock to
877,530 shares of common stock (693) 877 (184)
Issuance of 393,904 shares of
common stock for liquidation
preferences .......................... 394 (394)
Issuance of 1,700,000 shares of
common stock at $11.00 per
share, net of issuance costs ......... 1,700 16,667,817
Net loss for the year ended
December 31, 1995 ....................
Translation adjustment ................
Balances at December 31, 1995 ......... -- 6,447 32,672,438
Issuance of 100,000 shares of
common stock at $11.00 per
share, net of issuance costs ......... 100 990,595
Issuance of 39,148 shares of common
stock at $0.79 per share ............. 39 30,887
Issuance of 7,593 shares of common
stock at $0.59 per share ............. 8 4,472
Issuance of 79,767 shares of common
stock at $0.395 per share ............ 80 31,428
Repurchase of 10,000 shares of
common stock at $4.75 per share (10) (47,490)
Amortization of unearned
compensation .........................
Net loss for the year ended
December 31, 1996 ....................
Translation adjustment ................
Balances at December 31, 1996 ......... 6,664 33,682,330
Issuance of 51,965 shares of common
stock at $0.79 per share ............. 52 41,000
Issuance of 21,909 shares of common
stock at $4.50 per share ............. 22 98,366
Issuance of 12,658 shares of common
stock at $0.40 per share ............. 12 5,051
Amortization of unearned
compensation .........................
Net loss for the year ended
December 31, 1997 ....................
Translation adjustment ................
Balances at December 31, 1997 ......... $ -- $ 6,750 $ 33,826,747
====== ======= ============
<CAPTION>
CUMULATIVE TOTAL
TRANSLATION ACCUMULATED UNEARNED SHAREHOLDERS'
ADJUSTMENTS DEFICIT COMPENSATION EQUITY
------------- ----------------- -------------- --------------
<S> <C> <C> <C> <C>
Balances at December 31, 1994 ......... $ (557) $ (6,866,701) $ -- $ 7,427,851
Issuance of 210,900 shares of
Series A preferred stock at $6.25
per share, net of issuance costs ..... 1,278,806
Issuance of 3,671 shares of common
stock at $0.59 per share ............. 2,175
Issuance of 1,265 shares of common
stock at $0.5056 per share ........... 640
Issuance of 15,189 shares of common
stock at $0.3950 per share ........... 6,000
Unearned compensation related to
common stock options ................. (426,638) --
Amortization of unearned
compensation ......................... 382,638 382,638
Conversion of 693,272 shares of
Series A preferred stock to
877,530 shares of common stock --
Issuance of 393,904 shares of
common stock for liquidation
preferences .......................... --
Issuance of 1,700,000 shares of
common stock at $11.00 per
share, net of issuance costs ......... 16,669,517
Net loss for the year ended
December 31, 1995 .................... (3,952,233) (3,952,233)
Translation adjustment ................ (5,011) (5,011)
---------- ------------
Balances at December 31, 1995 ......... (5,568) (10,818,934) (44,000) 21,810,383
Issuance of 100,000 shares of
common stock at $11.00 per
share, net of issuance costs ......... 990,695
Issuance of 39,148 shares of common
stock at $0.79 per share ............. 30,926
Issuance of 7,593 shares of common
stock at $0.59 per share ............. 4,480
Issuance of 79,767 shares of common
stock at $0.395 per share ............ 31,508
Repurchase of 10,000 shares of
common stock at $4.75 per share (47,500)
Amortization of unearned
compensation ......................... 11,000 11,000
Net loss for the year ended
December 31, 1996 .................... (5,120,644) (5,120,644)
Translation adjustment ................ (42,510) (42,510)
---------- ------------
Balances at December 31, 1996 ......... (48,078) (15,939,578) (33,000) 17,668,338
Issuance of 51,965 shares of common
stock at $0.79 per share ............. 41,052
Issuance of 21,909 shares of common
stock at $4.50 per share ............. 98,388
Issuance of 12,658 shares of common
stock at $0.40 per share ............. 5,063
Amortization of unearned
compensation ......................... 11,000 11,000
Net loss for the year ended
December 31, 1997 .................... (4,679,211) (4,679,211)
Translation adjustment ................ 48,078 48,078
---------- ------------
Balances at December 31, 1997 ......... $ -- $ (20,618,789) $ (22,000) $ 13,192,708
========== ============= ========== ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE>
CARDIOVASCULAR DIAGNOSTICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997
----------------
<S> <C>
Cash flows from operating activities:
Net loss ...................................................................... $ (4,679,211)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization ............................................... 775,510
Amortization of intangible assets ........................................... 196,434
Amortization of discount on investments, net ................................ (22,743)
Amortization of deferred gain on sale-leaseback ............................. --
Provision for warranties .................................................... --
Provision for doubtful accounts ............................................. --
Amortization of unearned compensation ....................................... 11,000
Provision for inventory obsolescence ........................................ 220,000
Loss (gain) on disposal of fixed assets ..................................... (2,276)
Provision for deferred income taxes ......................................... --
Change in assets and liabilities:
Receivables ................................................................ (596,148)
Inventories ................................................................ (1,199,254)
Other assets ............................................................... 6,661
Accounts payable and accrued expenses ...................................... 1,004,612
Deferred revenue and gains ................................................. --
------------
Net cash used in operating activities ..................................... (4,285,415)
------------
Cash flows from investing activities:
Purchases of property and equipment ........................................... (1,494,564)
Proceeds from sales of property and equipment ................................. 3,433
Costs incurred to obtain patents .............................................. (63,969)
Purchases of short-term investments, held to maturity ......................... (2,503,852)
Proceeds from maturities of investments ....................................... 8,500,000
------------
Net cash provided by (used in) investing activities ....................... 4,441,048
------------
Cash flows from financing activities:
Proceeds from issuance of long-term debt ...................................... 3,005,404
Principal payments on long-term debt and capital lease obligations ............ (185,338)
Purchase of treasury stock .................................................... --
Net proceeds from issuance of stock ........................................... 144,503
------------
Net cash provided by financing activities ................................. 2,964,569
------------
Effect of exchange rates on cash ............................................... 48,078
------------
Net increase (decrease) in cash and cash equivalents ...................... 3,168,280
Cash and cash equivalents at beginning of year ................................. 2,716,242
------------
Cash and cash equivalents at end of year ....................................... $ 5,884,522
============
Supplemental disclosures of cash flow information:
Cash paid during the year for interest expense ................................ $ 1,638
============
Cash received during the year for interest income ............................. $ 393,843
============
Cash paid during the year for income taxes .................................... $ 42,819
============
Supplemental disclosure of noncash investing and financing activities:
Capital lease and debt obligations incurred for equipment ..................... $ --
============
Reduction in capital lease in exchange for equipment .......................... $ 15,900
============
<CAPTION>
1996 1995
---------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Net loss ...................................................................... $ (5,120,644) $ (3,952,233)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization ............................................... 663,809 550,342
Amortization of intangible assets ........................................... 203,479 213,805
Amortization of discount on investments, net ................................ (285,509) --
Amortization of deferred gain on sale-leaseback ............................. (4,247) (16,999)
Provision for warranties .................................................... -- 50,000
Provision for doubtful accounts ............................................. -- 40,395
Amortization of unearned compensation ....................................... 11,000 382,638
Provision for inventory obsolescence ........................................ 40,000 82,000
Loss (gain) on disposal of fixed assets ..................................... (3,192) 2,989
Provision for deferred income taxes ......................................... -- 7,573
Change in assets and liabilities:
Receivables ................................................................ (488,378) (271,020)
Inventories ................................................................ (753,947) (601,293)
Other assets ............................................................... (80,074) (142,392)
Accounts payable and accrued expenses ...................................... (743,426) 931,054
Deferred revenue and gains ................................................. -- (25,000)
------------- ------------
Net cash used in operating activities ..................................... (6,561,129) (2,748,141)
------------- ------------
Cash flows from investing activities:
Purchases of property and equipment ........................................... (1,417,977) (2,343,157)
Proceeds from sales of property and equipment ................................. 23,532 --
Costs incurred to obtain patents .............................................. (93,573) (144,763)
Purchases of short-term investments, held to maturity ......................... (10,687,896) --
Proceeds from maturities of investments ....................................... 5,000,000 --
------------- ------------
Net cash provided by (used in) investing activities ....................... (7,175,914) (2,487,920)
------------- ------------
Cash flows from financing activities:
Proceeds from issuance of long-term debt ...................................... -- 500,000
Principal payments on long-term debt and capital lease obligations ............ (751,446) (185,020)
Purchase of treasury stock .................................................... (47,500) --
Net proceeds from issuance of stock ........................................... 1,057,609 17,957,138
------------- ------------
Net cash provided by financing activities ................................. 258,663 18,272,118
------------- ------------
Effect of exchange rates on cash ............................................... (42,510) (5,011)
------------- ------------
Net increase (decrease) in cash and cash equivalents ...................... (13,520,890) 13,031,046
Cash and cash equivalents at beginning of year ................................. 16,237,132 3,206,086
------------- ------------
Cash and cash equivalents at end of year ....................................... $ 2,716,242 $ 16,237,132
============= ============
Supplemental disclosures of cash flow information:
Cash paid during the year for interest expense ................................ $ 11,589 $ 59,968
============= ============
Cash received during the year for interest income ............................. $ 473,288 $ 103,078
============= ============
Cash paid during the year for income taxes .................................... $ 76,724 $ 88,700
============= ============
Supplemental disclosure of noncash investing and financing activities:
Capital lease and debt obligations incurred for equipment ..................... $ 6,479 $ 21,095
============= ============
Reduction in capital lease in exchange for equipment .......................... $ -- $ --
============= ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE>
CARDIOVASCULAR DIAGNOSTICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Cardiovascular Diagnostics, Inc. (the "Company") develops, manufactures
and markets a proprietary cardiovascular diagnostic test system that provides
rapid and accurate evaluation of hemostasis at the point of patient care. The
Company's wholly-owned subsidiary, Coeur Laboratories, Inc. ("Coeur"),
manufactures and sells a line of disposable power injection syringes used for
cardiology and radiology procedures, as well as a line of manifolds used in
custom angiographic procedure kits. Cardiovascular Diagnostics Europe, BV
(CDE), a wholly-owned Dutch company, distributed the Company's products in
Europe until March 1997 when CDE operations were ceased.
In December 1995, the Company completed an initial public offering ("IPO")
of 1,700,000 new shares of $.001 par value common stock. The offering resulted
in gross proceeds of $18.7 million. Net of underwriting discount and offering
expenses, the Company received approximately $16.7 million.
In January 1996, the underwriters of the Company's IPO purchased an
additional 100,000 shares of the Company's common stock under the terms of an
option to purchase additional shares to cover over-allotments. The Company
received net proceeds of approximately $991,000 from the sale of these shares.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
INVESTMENTS
Investments are accounted for in accordance with Statement of Financial
Accounting Standards No. 115 (SFAS No. 115), "Accounting for Certain
Investments in Debt and Equity Securities." This statement requires certain
securities to be classified into three categories:
(a) Securities Held-to-Maturity -- Debt securities that the entity has the
positive intent and ability to hold to maturity are reported at amortized cost.
(b) Trading Securities -- Debt and equity securities that are bought and
held principally for the purpose of selling in the near term are reported at
fair value, with unrealized gains and losses included in earnings.
(c) Securities Available-for-Sale -- Debt and equity securities not
classified as either securities held to maturity or trading securities are
reported at fair value, with unrealized gains and losses excluded from earnings
and reported as a separate component of shareholders' equity.
Premiums are amortized and discounts accreted using the interest method
over the remaining terms of the related securities. Gains and losses on the
sale of securities are determined using the specific-identification method.
INVENTORIES
Inventories are stated at the lower of standard cost (which approximates
cost on a first-in, first-out basis) or market.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and are depreciated using the
straight-line method over the estimated useful lives of the respective assets,
which range from three to seven years. Leasehold improvements are amortized
over the shorter of the estimated useful lives of the improvements, or the term
of the facility lease.
F-7
<PAGE>
CARDIOVASCULAR DIAGNOSTICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (Continued)
Expenditures for repairs and maintenance are charged to expense as
incurred. The costs of major renewals and betterments are capitalized and
depreciated over their estimated useful lives. Upon disposition, the cost and
related accumulated depreciation of property and equipment are removed from the
accounts and any resulting gain or loss is reflected in operations.
INTANGIBLE ASSETS
Excess of cost over fair value of net assets acquired ("goodwill")
resulted from the acquisition of Coeur and is being amortized over ten years
using the straight-line method. Patent costs are capitalized and are amortized
using the straight-line method over their estimated useful lives (13 to 17
years). Periods of amortization are evaluated periodically to determine whether
later events and circumstances warrant revised estimates of useful lives.
At each balance sheet date, the Company evaluates the recoverability of
unamortized goodwill based upon expectations of nondiscounted cash flows and
operating income of Coeur. Impairments, if any, would be recognized in
operating results if a permanent diminution in value were to occur.
CONVERTIBLE DEBT
Convertible debt is recorded as a liability until converted into common
stock, at which time it is recorded as equity.
REVENUE AND INCOME RECOGNITION POLICIES
Revenue from the sale of products is recorded at the time the goods are
shipped or when title passes. Income under license and development agreements
is recorded upon the achievement of certain milestones contained in these
agreements. Income from research grants is recognized when amounts are expended
for the specific purpose stated in the grant.
INCOME TAXES
Deferred tax assets and liabilities are determined based on the difference
between the financial statement and tax basis of assets and liabilities using
enacted tax rates in effect for the year in which the differences are expected
to affect taxable income. Valuation allowances are established when necessary
to reduce deferred tax assets to the amounts expected to be realized.
LOSS PER COMMON SHARE
On December 31, 1997, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings Per Share." In accordance with
SFAS 128, the Company has replaced the presentation of primary earnings per
share ("EPS") with a presentation of basic EPS and has presented both basic and
diluted EPS on the face of the Statement of Operations. Basic EPS excludes
dilution and is computed by dividing income available to common shareholders by
the weighted average number of common shares outstanding for the period.
Diluted EPS is the same as basic EPS because, for loss periods, potential
common shares (such as options) are not included in computing diluted EPS since
the effect would be antidilutive. Options currently outstanding that could be
dilutive in the future are summarized in Note 10.
STOCK OPTIONS
On January 1, 1996 the Company adopted Statement of Financial Accounting
Standards No. 123, "Accounting for Stock Based Compensation" (SFAS No. 123). As
permitted by SFAS No. 123, the Company has chosen to continue to apply APB
Opinion No. 25 "Accounting for Stock issued to Employees" (APB No. 25) and
related interpretations in accounting for its stock plans. Note 10 summarizes
the compensation cost for the Company's plans if the grants had been based on
the fair value at the grant dates consistent with SFAS 123.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standard No. 107, "Disclosures about the
Fair Value of Financial Instruments" (SFAS 107) requires the disclosure of fair
value information about financial instruments whether or not recognized on the
balance sheet, for which it is practicable to estimate the value. Where quoted
market prices are not readily available, fair
F-8
<PAGE>
CARDIOVASCULAR DIAGNOSTICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (Continued)
values are based on quoted market prices of comparable instruments. The
carrying amount of cash and equivalents, accounts receivable and accounts
payable approximates fair value because of the short maturity of those
instruments. The fair value of the Company's debt issues are estimated to
approximate fair value because the debt was issued shortly before December 31,
1997.
USE OF ESTIMATES IN THE PREPARATION OF THE FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
RECENT ACCOUNTING PRONOUNCEMENTS
The Company will adopt Statement of Financial Accounting Standards No. 131
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS
No. 131") beginning January 1, 1998. SFAS No. 131 requires the Company to
report selected information about operating segments in its financial reports
issued to shareholders. It also establishes standards for related disclosures
about products and services, geographic areas, and major customers. The Company
does not believe the adoption of the new pronouncement will have a significant
impact on the financial statements.
The Company will adopt Statement of Financial Accounting Standards No. 130
"Reporting Comprehensive Income" ("SFAS No. 130") beginning January 1, 1998.
SFAS No. 130 requires the Company to display an amount representing total
comprehensive income for the period in a financial statement which is displayed
with the same prominence as other financial statements. Upon adoption, all
prior period data presented will be restated to conform to the provisions of
SFAS No. 130. The Company does not believe the adoption of the new
pronouncement will have a significant impact on the financial statements.
2. SHORT-TERM INVESTMENTS
At December 31, 1997, no short-term investments were held by the Company.
At December 31, 1996 the Company classified investment securities in the
consolidated financial statements according to management's intent. Investment
securities at December 31, 1996 are summarized as follows:
<TABLE>
<CAPTION>
GROSS UNREALIZED
AMORTIZED ------------------ ESTIMATED
COST GAINS LOSSES MARKET VALUE
------------- --------- -------- -------------
<S> <C> <C> <C> <C>
Held-to-maturity:
U.S. Treasury obligations .. $5,973,405 $6,275 $-- $5,979,680
========== ====== === ==========
</TABLE>
3. INVENTORIES
Inventories at December 31, 1997 and 1996 consisted of the following:
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Raw materials ........... $2,122,058 $1,431,534
Finished goods .......... 875,994 587,264
---------- ----------
$2,998,052 $2,018,798
========== ==========
</TABLE>
F-9
<PAGE>
CARDIOVASCULAR DIAGNOSTICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1997 and 1996 consisted of the
following:
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Molds and equipment ................................... $6,039,207 $4,775,327
Furniture, fixtures and EDP equipment ................. 966,927 711,993
Leasehold improvements ................................ 1,134,337 1,040,093
Equipment under capital leases ........................ 266,291 325,234
Automobiles ........................................... -- 16,222
---------- ----------
8,406,762 6,868,869
Less accumulated depreciation and amortization ........ 3,468,637 2,632,741
---------- ----------
$4,938,125 $4,236,128
========== ==========
</TABLE>
5. INTANGIBLE ASSETS
Intangible assets at December 31, 1997 and 1996 consisted of the
following:
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Excess of cost over fair value of net assets acquired ................... $1,802,506 $1,802,506
Patents ................................................................. 517,430 478,338
Other ................................................................... 110,000 85,123
---------- ----------
2,429,936 2,365,967
Less accumulated amortization ........................................... 861,841 665,407
---------- ----------
$1,568,095 $1,700,560
========== ==========
</TABLE>
6. RESEARCH AND DEVELOPMENT GRANTS
The Company has recognized income related to National Institutes of Health
Small Business Innovation Research grant awards as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ----------- ----------
<S> <C> <C> <C>
Phase I grant award of $487,269 for research related to
thrombolytic drug research ................................... $ -- $ -- $ 8,587
Phase II grant award of $315,041 for research related to
thrombolytic drug research ................................... -- -- 114,500
Phase I grant award of $75,000 for research related to rapid
monitoring of antithrombin agents ............................ -- -- 75,000
Grant award of $100,000 for research related to a rapid
immunoassay for acute myocardial injury detection ............ -- 10,466 94,447
Phase II grant award of $750,000 for research related to
rapid monitoring of antithrombin agents ...................... 278,121 243,738 --
-------- -------- --------
$278,121 $254,204 $292,534
======== ======== ========
</TABLE>
7. DEVELOPMENT INCOME
During 1997, the Company recognized $825,000 of development income related
to collaboration agreements with Knoll AG, Eli Lilly and Company, and Dade
International. This was the result of the Company meeting milestones in
accordance with these collaboration agreements.
F-10
<PAGE>
CARDIOVASCULAR DIAGNOSTICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. LONG-TERM DEBT
Long-term debt as of December 31, 1997 and 1996 consisted of the
following:
<TABLE>
<CAPTION>
1997 1996
------------ ----------
<S> <C> <C>
Convertible financial assistance agreement ............. $ 50,000 $ 50,000
Notes payable .......................................... 2,833,373 --
---------- ----------
2,883,373 50,000
Current portion of long-term debt ...................... 533,218 --
---------- ----------
Long-term debt, excluding current portion .............. $2,350,155 $ 50,000
========== ==========
</TABLE>
In January 1994, the Company received a $50,000 loan pursuant to a
financial assistance agreement to fund research. The funds were used only for
direct costs related to the approved project. The $50,000, plus interest at
7.5% per annum, is due in January 1999. The loan, at the request of the lender,
can be converted at any time into common stock based on an exercise price of
$5.33 per share, subject to adjustment for stock splits, stock dividends,
combinations and other similar events. Accrued but unpaid interest is not
convertible into common stock. This agreement includes certain covenants
relating to, among other things, use of funds and maintenance of a significant
presence in the State of North Carolina for a period of five years. Management
believes the Company was in compliance with all of these covenants at December
31, 1997 and 1996.
In December 1997, the Company received a loan for $3,005,404 from
Transamerica Business Credit Corporation to fund working capital and capital
expenditures. The loan has an interest rate of 15%, payable monthly, and is
collateralized by existing fixed assets and new equipment financed under the
loan. The loan includes certain covenants relating to, among other things, the
maintenance of the collateral. Management believes the Company was in
compliance with these covenants at December 31, 1997. The aggregate amounts of
maturities on this loan are as follows: 1998, $533,218; 1999, $673,873; 2000,
$785,544; and 2001, $840,738.
9. LEASES
The Company leases its office space under a noncancelable operating lease
agreement. In January 1995, the lease term was extended from 1996 to 2001. In
addition, the Company leases certain equipment under various capital and
operating lease agreements. Equipment held under capital leases as of December
31, 1997 and 1996 was $266,291 and $325,234, respectively, and the related
accumulated amortization was $257,149 and $285,535, respectively. Rent expense
related to operating leases totaled $471,592, $416,635, and $317,334 for the
years ended December 31, 1997, 1996 and 1995, respectively.
Future minimum lease payments as of December 31, 1997 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, CAPITAL LEASES OPERATING LEASES
- ---------------------------------------------------- ---------------- -----------------
<S> <C> <C>
1998 ........................................ $ 6,180 $ 379,298
1999 ........................................ 1,030 381,364
2000 ........................................ -- 389,790
2001 ........................................ -- 44,911
------- -----------
Total minimum lease payments ................ 7,210 $ 1,195,363
===========
Imputed interest ............................ (348)
-------
Present value of minimum lease payments ..... 6,862
Less current maturities ..................... 5,842
-------
Long-term capital lease obligations ......... $ 1,020
=======
</TABLE>
F-11
<PAGE>
CARDIOVASCULAR DIAGNOSTICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. SHAREHOLDERS' EQUITY
AUTHORIZED SHARES
In November 1995 the Company amended its Articles of Incorporation to
increase the number of authorized shares of common stock to 10,000,000.
COMMON STOCK
In January and February 1994, the Company raised $2,723,319, net of
issuance costs, in a private placement of 612,638 shares of its common stock.
In December 1994, the Company raised $2,878,843, net of issuance costs, in
a private placement of 482,372 shares of its Series A participating preferred
stock.
In January 1995, the Company raised $1,278,806, net of issuance costs, in
a private placement of 210,900 shares of Series A participating preferred
stock.
The authorized and designated Series A preferred stock outstanding prior
to the closing of the IPO had rights, preferences and privileges related to
liquidation, dividends, voting and conversion. Upon the closing of the IPO,
each share of Series A preferred stock was converted into the number of common
shares as was determined by dividing $6.25 by the Series A conversion price
($4.94 at the closing of the IPO), resulting in 877,530 shares of common stock.
Upon closing of the Company's IPO, in addition to the shares issued upon
conversion, the holders of the Series A preferred stock were issued the number
of shares of common stock as was determined by dividing the Series A
Preferential Amount ($4.94) by the price per share of common stock in the
public offering. Based upon the IPO price, the holders of the Series A
preferred stock were issued an additional 393,904 shares of common stock,
representing fair value of $4,332,948. The issuance of these shares has been
recorded at par value with a corresponding reduction in additional paid-in
capital. As of December 31, 1997 and 1996, no shares of preferred stock were
outstanding and none of the 1,000,000 authorized shares were designated. The
Company's Board of Directors is authorized, without further shareholder action,
to issue preferred stock in one or more series and to fix the voting rights,
liquidation preferences, dividend rights, repurchase rights, conversion rights,
redemption rights and terms, including sinking fund provisions, and certain
other rights and preferences, of the preferred stock. Although there is no
current intention to do so, the Board of Directors of the Company may, without
shareholder approval, issue shares of a class or series of preferred stock with
voting and conversion rights which could adversely affect the voting power or
dividend rights of the holders of common stock and may have the effect of
delaying, deferring or preventing a change in control of the Company.
STOCK WARRANTS
At December 31, 1994, 6,567 warrants at exercise prices ranging from
$0.5056 to $9.0182 per share were outstanding. In conjunction with the 1995
common stock offering, the Company issued warrants for the purchase of 15,189
shares of common stock at $0.3950 per share. In September 1995, 16,455 warrants
were exercised, and, upon the closing of the IPO, 1,504 warrants expired,
leaving 3,797 warrants with an exercise price of $4.94 per share outstanding.
In 1996, the remaining 3,797 warrants expired.
STOCK OPTIONS
The Company has a stock option plan (the "Plan") whereby nonqualified
stock options are granted to key employees. Under the terms of the Plan,
options to purchase common stock are granted at a price determined by the Board
of Directors. These options may be exercised during specified future periods
and generally expire ten years from date of grant.
During the year ended December 31, 1994, a stock option plan (the "1994
Plan") was established to purchase common stock. Options granted under the 1994
Plan generally vest over four years. Certain options granted to date under the
1994 Plan also provided for acceleration of vesting upon the achievement by the
Company of certain milestones and became fully vested by their terms upon the
closing of the IPO. During the year ended December 31, 1995, the exercise price
of these options was reduced to $0.79. Also during the year ended December 31,
1995, the Company granted options to purchase 55,694 shares of the Company's
common stock at an exercise price of $0.79 which vest over four years.
F-12
<PAGE>
CARDIOVASCULAR DIAGNOSTICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. SHAREHOLDERS' EQUITY -- (Continued)
During 1995, the Company recorded unearned compensation of $426,638, which
represented the amount by which the deemed fair value of the Company's common
stock exceeded the exercise price on the date of grant. During 1995, $382,638
of the unearned compensation was recorded as compensation expense, which
represented the expense related to the options that became fully vested upon
the closing of the IPO. The remaining unearned compensation is being amortized
to compensation expense over the vesting period, which is generally four years.
During both 1997 and 1996, $11,000 of this expense was recognized.
In November 1995 the shareholders of the Company approved, effective upon
completion of the IPO, the adoption of the Company's 1995 Stock Plan (the "1995
Plan"). The 1995 Plan reserves 488,150 shares of the Company's common stock for
issuance to employees, consultants and directors of the Company. Options
granted under the 1995 Plan generally vest over four years and have a term of
ten years.
A summary of the status of the Company's Plans as of December 31, 1997,
1996 and 1995, and changes during the years ending on those dates is presented
below:
<TABLE>
<CAPTION>
1997 1996 1995
----------------------- ------------------------ ---------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------------ ---------- ------------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year ..... 757,796 $ 2.15 865,000 $ 3.58 601,192
Granted .............................. 323,375 4.88 109,000 4.50 271,984
Exercised ............................ (86,532) 1.67 (126,508) 0.73 (3,670)
Forfeited ............................ (116,449) 4.58 (89,696) 0.58 (4,506)
-------- ------- -------- ------- -------
Outstanding at end of year ........... 878,190 $ 2.88 757,796 $ 2.15 865,000 $ 3.58
======== ======= ======== ======= ======= ======
Options exerciseable at year-end ..... 498,280 451,558 593,016
======== ======== =======
</TABLE>
The weighted average fair value of options granted during the years ended
December 31, 1997 and 1996 was $3.14 and $2.89, respectively.
The following table summarizes information about the Plan's stock options
at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------- -----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
NUMBER REMAINING AVERAGE NUMBER AVERAGE
RANGE OF OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
EXERCISE PRICES AT 12/31/97 LIFE PRICE AT 12/31/97 PRICE
- ----------------- ------------- ------------- ---------- ------------- ---------
<S> <C> <C> <C> <C> <C>
$ 0.79 426,448 6.5 years .79 408,729 .79
$3.75 - $6.50 446,742 9.1 years 4.77 84,551 4.57
$ 12.10 5,000 8.4 years 12.10 5,000 12.10
------- -------
878,190 498,280
======= =======
</TABLE>
The Company reviewed the provisions of SFAS No. 123 and elected to
continue to use the provisions of APB Opinion 25. However, the Company is
required to disclose the pro forma effects on net income regarding the new fair
value based method. The fair value of each option grant is estimated on the
date of grant using the Black-Scholes option-pricing model with the following
assumptions used for grants in 1997 and 1996, respectively: dividend yield,
zero; expected volatility of 65% and 63%; risk free interest rate of 5.75% and
6.25%; and expected life of 6 years. Had compensation cost for the Company's
stock-based compensation plans, as described above, been determined consistent
with SFAS No. 123, the Company's net income and earnings per share would have
been reduced to the pro forma amounts indicated below. The compensation costs
disclosed here may not be representative of the effects of pro forma net income
in future years.
F-13
<PAGE>
CARDIOVASCULAR DIAGNOSTICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. SHAREHOLDERS' EQUITY -- (Continued)
<TABLE>
<CAPTION>
1997 1996
---------------- ----------------
<S> <C> <C>
Net loss As reported .......... $ (4,679,211) $ (5,120,644)
Pro forma ............ (5,011,787) (5,199,261)
Net loss per common share As reported .......... (0.70) (0.78)
Pro forma ............ (0.75) (0.79)
</TABLE>
11. SIGNIFICANT CUSTOMERS AND CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash and cash equivalents
and accounts receivable. The Company places its temporary cash in accounts with
federally insured depository institutions. At December 31, 1997 the Company had
a majority of its cash invested in one financial institution.
Concentrations of credit risk with respect to trade receivables exist due
to the Company's small customer base. Periodic credit evaluations of customers'
financial condition are performed and generally no collateral is required. The
Company establishes reserves for expected credit losses and such losses, in the
aggregate, have not exceeded management's expectations.
During the years ended December 31, 1997, 1996 and 1995 there were sales
to three customers that exceeded 10% of net consolidated sales. Sales to these
customers were: 1997 -- customer A, $2,291,581 (30%), customer B, $1,375,728
(18%), customer C, $1,276,566 (17%), 1996 -- customer A, $2,192,778 (34%),
customer B, $671,188 (10%) and customer C, $195,400 (3%); 1995 -- customer A,
$2,095,548 (40%), customer B, $632,781 (12%) and customer C, $0 (0%). The
Company operates in a single industry segment, providing medical diagnostic and
imaging products.
The Company had operations in two geographic regions, the United States
and Europe, until March 31, 1997. At that date, the Company closed its European
office and sales are now made through foreign distributors. The Company began
its European operations in 1994 and revenues from its foreign operations did
not exceed 10% of its consolidated revenues in 1995. During 1997 and 1996,
revenues from foreign operations were approximately $99,000 and $725,000,
respectively, substantially all of which were from customers in Europe and the
United Kingdom. In addition, the Company's identifiable assets of its foreign
operations at December 31, 1996 and 1995 were less than 10% of its consolidated
total assets.
The Company generated revenue from all export sales as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------- -------------
<S> <C> <C> <C>
United Kingdom .............. $ 776,260 $ 957,980 $ 850,311
Other ....................... 1,190,631 684,728 650,633
---------- ---------- ----------
Total export sales .......... $1,966,891 $1,642,708 $1,500,944
========== ========== ==========
</TABLE>
12. LICENSE AGREEMENTS
The Company entered into a license agreement with Tokuyama Soda Company,
Ltd. ("TS"), as amended in December 1995, pursuant to which the Company granted
TS exclusive rights to manufacture and sell PT and aPTT tests and analyzers in
certain Asian countries. The Company received royalty payments under this
agreement of $30,741, $32,835, and $63,176 during the years ended December 31
1997, 1996 and 1995, respectively.
Additionally, the Company had a license agreement with Boehringer Mannheim
Corporation. The Company received royalty payments under this agreement of
$61,596 during the year ended December 31, 1995. All obligations under this
license agreement were terminated effective June 30, 1995.
13. INCOME TAXES
Income tax expense consisted entirely of current state taxes of $82,083,
$51,860, and $82,136 for the years ended December 31, 1997, 1996 and 1995,
respectively.
F-14
<PAGE>
CARDIOVASCULAR DIAGNOSTICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. INCOME TAXES -- (Continued)
A reconciliation of expected income tax at the statutory Federal rate of
34% with the actual income tax expense for the years ended December 31, 1997,
1996 and 1995 is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------------- ---------------- ----------------
<S> <C> <C> <C>
Expected income tax benefit at statutory rate ...... $ (1,563,159) $ (1,706,576) $ (1,315,832)
State tax provision (benefit) ...................... (175,748) (114,326) (25,373)
Goodwill amortization .............................. 62,830 62,830 62,985
Compensation paid with incentive stock options ..... 3,740 3,740 130,097
Other .............................................. 7,373 16,192 157,259
Change in valuation allowance ...................... 1,747,047 1,790,000 1,073,000
------------ ------------ ------------
Net income tax provision ........................... $ 82,083 $ 51,860 $ 82,136
============ ============ ============
</TABLE>
The components of the net deferred tax assets and net deferred tax
liabilities as of December 31, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
1997 1996
--------------- ---------------
<S> <C> <C>
Deferred tax assets:
Accrued expenses ......................... $ 15,000 $ 17,000
Other .................................... 108,000 28,000
Alternative minimum tax credits .......... 9,000 9,000
Net operating loss carryforward .......... 7,825,000 6,446,000
Research and development credits ......... 229,000 229,000
Foreign tax credits ...................... 35,000 35,000
------------ ------------
Total gross deferred tax assets .......... 8,221,000 6,764,000
Valuation allowance ...................... (7,923,000) (6,536,000)
------------ ------------
Net deferred tax assets ............ 298,000 228,000
------------ ------------
Deferred tax liabilities:
Patents .................................. 159,000 160,000
Fixed assets ............................. 139,000 68,000
------------ ------------
Total gross deferred tax liabilities ..... 298,000 228,000
------------ ------------
Net deferred taxes ............... $ -- $ --
============ ============
</TABLE>
At December 31, 1997 and 1996, the Company had approximately $20,718,000
and $16,089,000, respectively, of combined net operating losses, $229,000 of
research and development tax credits, $35,000 of foreign tax credits, and
$9,000 of alternative minimum tax credits available to offset future federal
income taxes. These carryforwards expire in 2003 through 2011 if not utilized.
At December 31, 1997 and 1996 for state income tax purposes, Cardiovascular
Diagnostics, Inc. had net operating loss carryforwards of approximately
$17,185,073 and $12,020,782, respectively. These carryforwards expire in 1998
through 2003 if not utilized. To the extent that Coeur's net operating losses
incurred through 1994 (approximately $2,000,000 at December 31, 1997) are
utilized in the future, the benefit will reduce the excess of cost over fair
value of net assets acquired.
Due to the Company's and Coeur's history of operating losses and
uncertainty regarding future operations, management has determined that a
valuation allowance equal to the amount of net deferred tax assets is required.
As a result of changes in ownership, as defined by Internal Revenue Code
Section 382, Coeur's losses through 1993 and the Company's consolidated losses
through January 1994 will be subject to an annual limitation of $175,000 and
$482,000, respectively.
An additional change in ownership occurred in 1995 in connection with the
Company's IPO which subjects the losses incurred since January 1994 to December
1995 to an incremental annual limitation of $1,954,000 per year.
F-15
<PAGE>
CARDIOVASCULAR DIAGNOSTICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. CONTINGENCIES
In March 1997, the Company filed suit in the U.S. District Court, Eastern
District of North Carolina, against Boehringer Mannheim Corporation ("BMC")
located in Indiana. The suit charged BMC with misappropriation of CVDI's trade
secrets by improper disclosure, breach of contract, breach of fiduciary duty,
unfair and deceptive trade practices, and constructive fraud. In addition, CVDI
requested a declaratory judgment that neither the products nor activities of
CVDI infringe U.S. Patents purportedly owned by BMC. On April 9, 1997 BMC
answered the claims made by CVDI and submitted a patent infringement
counterclaim against CVDI. Each party filed a motion for judgment on the
pleading with respect to all claims asserted by the other party. On November
10, 1997, the Court issued a Judgment and Order granting CVDI's motion for
judgment on the pleadings, holding that CVDI has a license, until June 21, 1999
or until the last of the patents expire, to the patents at issue. It dismissed
all other claims of the parties. Both parties have appealed and are awaiting
the Court's decision. It is management's opinion that the disposition of this
matter will not have a material adverse effect on the consolidated financial
position, results of operations or liquidity of the Company.
15. COMMITMENTS
The Company has several agreements to sell its products to customers at
fixed prices. Management does not anticipate any losses resulting from these
commitments.
F-16
<PAGE>
CARDIOVASCULAR DIAGNOSTICS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
------------ -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ........................................................... $ 3,800 $ 5,885
Accounts receivable ................................................................. 1,724 1,888
Inventories ......................................................................... 2,604 2,998
Other current assets ................................................................ 394 217
--------- ---------
Total current assets .............................................................. 8,522 10,988
Property and equipment, net .......................................................... 4,862 4,938
Intangible assets, net ............................................................... 1,488 1,568
Other assets, net .................................................................... 152 191
--------- ---------
Total assets ...................................................................... $ 15,024 $ 17,685
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable .................................................................... $ 391 $ 1,138
Accrued expenses .................................................................... 159 464
Current portion of long term debt ................................................... 624 539
--------- ---------
Total current liabilities ......................................................... 1,174 2,141
Long term debt and capital lease obligations, less current portion ................... 2,030 2,351
--------- ---------
Total liabilities ................................................................. 3,204 4,492
--------- ---------
Shareholders' equity:
Preferred stock, $.001 par value; authorized 1,000,000 shares--no shares issued or
outstanding at June 30, 1998 and December 31, 1997 ................................
Common stock, $.001 par value; authorized 10,000,000 shares; 6,805,079 and 6,750,518
issued and outstanding at June 30, 1998 and December 31, 1997, respectively. ...... 7 7
Additional paid-in capital ........................................................... 33,973 33,827
Accumulated deficit .................................................................. (22,143) (20,619)
Unearned compensation ................................................................ (17) (22)
--------- ---------
Total shareholders' equity ........................................................ 11,820 13,193
--------- ---------
Total liabilities and shareholders' equity ........................................ $ 15,024 $ 17,685
========= =========
Commitments and contingencies
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-17
<PAGE>
CARDIOVASCULAR DIAGNOSTICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------------- ----------------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1998 1997 1998 1997
------------ ------------- ------------ ---------------
<S> <C> <C> <C> <C>
Net sales ........................................ $ 2,192 $ 1,759 $ 4,596 $ 4,043
Cost of goods sold ............................... 1,504 1,427 3,149 2,950
---------- ---------- ---------- ---------
Gross profit ..................................... 688 332 1,447 1,093
Operating expenses:
General and administrative ...................... 844 1,006 1,608 1,765
Sales and marketing ............................. 176 328 404 623
Research and development ........................ 636 646 1,267 1,171
---------- ---------- ---------- ---------
Total operating expenses ...................... 1,656 1,980 3,279 3,559
---------- ---------- ---------- ---------
Operating loss ................................... (968) (1,648) (1,832) (2,466)
---------- ---------- ---------- ---------
Other income(expense):
Interest expense ................................ (104) -- (180) (1)
Interest income ................................. 48 101 113 208
Grant/royalty income ............................ 45 138 52 138
Development income .............................. -- 475 375 725
---------- ---------- ---------- -----------
Total other income (expense) .................. (11) 714 360 1,070
---------- ---------- ---------- -----------
Net loss before taxes ............................ (979) (934) (1,472) (1,396)
Provision for income taxes ....................... (26) (14) (52) (29)
---------- ---------- ---------- -----------
Net loss ......................................... $ (1,005) $ (948) $ (1,524) $ (1,425)
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments ........ -- 56 -- (52)
---------- ---------- ---------- -----------
Comprehensive loss ............................... $ (1,005) $ (892) $ (1,524) $ (1,477)
========== ========== ========== ===========
Basic and diluted net loss per common share ...... $ (0.15) $ (0.14) $ (0.23) $ (0.21)
========== ========== ========== ===========
Average weighted shares outstanding .............. 6,800,332 6,729,722 6,782,388 6,722,151
========== ========== ========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-18
<PAGE>
CARDIOVASCULAR DIAGNOSTICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
-------------------------
JUNE 30, JUNE 30,
1998 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss ...................................................................... $ (1,524) $ (1,425)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation ................................................................ 442 316
Amortization ................................................................ 146 93
Stock based compensation: general and administrative ........................ 76 --
Change in assets and liabilities:
Receivables ................................................................ 164 (1,099)
Inventories ................................................................ 394 (294)
Other assets ............................................................... (170) 139
Accounts payable and accrued expenses ...................................... (1,052) (43)
-------- --------
Net cash used in operating activities ..................................... (1,524) (2,313)
-------- --------
Cash flows from investing activities:
Payments for purchase of property and equipment ............................... (366) (479)
Costs incurred to obtain patents .............................................. (29) (10)
Purchase of investments ....................................................... -- (5,531)
Proceeds from maturities of investments ....................................... -- 7,750
-------- --------
Net cash (used in) provided by investing activities ....................... (395) 1,730
-------- --------
Cash flows from financing activities:
Principal payments on long-term debt and capital lease obligations ............ (236) (26)
Net proceeds from issuance of stock ........................................... 70 40
-------- --------
Net cash (used in) provided by financing activities ....................... (166) 14
-------- --------
Effect of exchange rates on cash ............................................... 0 (52)
Net decrease in cash and cash equivalents ................................. (2,085) (621)
Cash and cash equivalents at beginning of period ............................... 5,885 2,716
-------- --------
Cash and cash equivalents at end of period ..................................... $ 3,800 $ 2,095
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-19
<PAGE>
CARDIOVASCULAR DIAGNOSTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION
Cardiovascular Diagnostics, Inc. (the "Company" or "CVDI") develops,
manufactures and markets rapid turnaround, point-of-care diagnostic tests to
assess blood clot formation and dissolution. These tests are based on the
Company's proprietary, dry chemistry Thrombolytic Assessment System ("TAS").
The Company's wholly-owned subsidiary, Coeur Laboratories ("Coeur"),
manufactures and sells disposable power injection syringes and manifolds. The
consolidated financial statements include the accounts of the Company and the
wholly-owned subsidiary. All intercompany activity has been eliminated. The
consolidated financial statements included herein as of any date other than
December 31 have been prepared by the Company without audit, pursuant to the
rules and regulations of the Securities and Exchange Commission. Financial
information as of December 31 has been derived from the audited financial
statements of the Company, but does not include all disclosures required by
generally accepted accounting principles. In the opinion of management, the
accompanying unaudited consolidated financial statements include all
adjustments (consisting only of normal recurring adjustments) necessary to
present fairly the consolidated financial position, results of operations and
cash flows of the Company. For further information regarding the Company's
accounting policies, refer to the Consolidated Financial Statements and related
notes included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1997. Results for the interim period are not necessarily
indicative of the results for any other interim period or for the full fiscal
year.
NOTE 2. INCOME TAXES PAID
No federal income tax provision or benefit has been provided for income
tax purposes, as the Company has not realized net income for the quarter ended
June 30, 1998 and has net operating loss carryforwards to offset any net income
when realized. Income tax expense recognized represents management's estimate
of Coeur's state income tax expense for the quarter ended June 30, 1998.
NOTE 3. CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of
three months or less at the date of purchase to be cash equivalents.
NOTE 4. INVENTORY
Inventories consisted of the following:
<TABLE>
<CAPTION>
JUNE 30, 1998 DECEMBER 31, 1997
--------------- ------------------
<S> <C> <C>
Raw materials ......... $2,109,067 $2,122,058
Finished goods ........ 494,731 875,994
---------- ----------
$2,603,798 $2,998,052
========== ==========
</TABLE>
NOTE 5. LOSS PER COMMON SHARE
On December 31, 1997, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings Per Share" ("EPS"). In
accordance with SFAS No. 128, the Company is required to present both basic and
diluted EPS on the face of the Statement of Operations and Comprehensive Loss.
Basic EPS excludes dilution and is computed by dividing income (loss) available
to common shareholders by the weighted average number of common shares
outstanding for the period. Diluted EPS is the same as basic EPS because, for
loss periods, potential common shares (such as options) are not included in
computing diluted EPS since the effect would be antidilutive.
NOTE 6. NEW ACCOUNTING PRONOUNCEMENTS
The Company has adopted SFAS No. 130 "Reporting Comprehensive Income"
beginning January 1, 1998. SFAS No. 130 requires the Company to display an
amount representing total comprehensive income (loss) for all periods
presented.
F-20
<PAGE>
CARDIOVASCULAR DIAGNOSTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 6. NEW ACCOUNTING PRONOUNCEMENTS -- (Continued)
The Company has elected to display this information in a Statement of
Operations and Comprehensive Loss. All prior period data has been restated to
conform to the provisions of this statement.
The Company will adopt SFAS No. 131 "Disclosures about Segments of an
Enterprise and Related Information" beginning in 1998. SFAS No. 131 requires
the Company to report selected information about operating segments beginning
as of December 31, 1998. It also establishes standards for related disclosures
about products and services, geographic areas and major customers. The Company
does not believe the adoption of the new pronouncement will have a significant
impact on the consolidated financial statements.
NOTE 7. LEGAL PROCEEDINGS
As reported in its filings on Form 10-K for the period ended December 31,
1997, in March 1997, the Company filed suit in the U. S. District Court,
Eastern District of North Carolina, against Boehringer Mannheim Corporation
("BMC") located in Indiana. The suit charged BMC with misappropriation of
CVDI's trade secrets by improper disclosure, breach of contract, breach of
fiduciary duty, unfair and deceptive trade practices, and constructive fraud.
In addition, CVDI requested a declaratory judgment that neither the products
nor activities of CVDI infringe U.S. Patents purportedly owned by BMC. On April
9, 1997 BMC answered the claims made by CVDI and submitted a counterclaim
against CVDI. Each party filed a motion for judgment on the pleading with
respect to all claims asserted by the other party. On November 10, 1997, the
Court issued a Judgement and Order granting CVDI's motion for judgment on the
pleadings, holding that CVDI has a license, until June 21, 1999, or until the
last of the patents expire, to the patents at issue. It dismissed all other
claims of the parties. Both parties have appealed and are awaiting the Court's
decision. It is management's opinion that the disposition of this matter will
not have a material adverse impact on the consolidated financial position,
results of operations or liquidity of the Company.
F-21
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS
CARDIOVASCULAR DIAGNOSTICS, INC.
In connection with our audits of the consolidated financial statements of
Cardiovascular Diagnostics, Inc. and subsidiaries as of December 31, 1997 and
1996, and for each of the three years in the period ended December 31, 1997,
which consolidated financial statements are included in the Prospectus, we have
also audited the consolidated financial statement schedule listed in Item 21
herein.
In our opinion, the consolidated financial statement schedule referred to
above, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information required to be included therein.
/s/ COOPERS & LYBRAND L.L.P.
Raleigh, North Carolina
February 12, 1998
F-22
<PAGE>
CARDIOVASCULAR DIAGNOSTICS, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
BALANCE AT CHARGE TO BALANCE AT
BEGINNING COSTS AND END
OF PERIOD EXPENSES DEDUCTIONS OF PERIOD
------------ ----------- --------------- -----------
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1997
Deducted from asset accounts:
Accounts Receivable Reserve (a) .......... $ 5,000 $ -- $ 1,208(f) $ 3,792
======= ======== ========= ========
Inventory Reserves (b) ................... $48,256 $220,000 $ 36,917(e) $231,339
======= ======== ========= ========
Added liability accounts:
Warranty Reserves (c) .................... $43,845 $ -- $ 5,274(d) $ 38,571
======= ======== ========= ========
YEAR ENDED DECEMBER 31, 1996
Deducted from asset accounts:
Accounts Receivable Reserves (a) ......... $40,395 $ 0 $ 35,395(f) $ 5,000
======= ======== ========= ========
Inventory Reserves (b) ................... $82,000 $ 40,000 $ 73,744(e) $ 48,256
======= ======== ========= ========
Added to liability accounts:
Warranty Reserves (c) .................... $50,000 $ 0 $ 6,155(d) $ 43,845
======= ======== ========= ========
YEAR ENDED DECEMBER 31, 1995
Deducted from asset accounts:
Accounts Receivable Reserves (a) ......... $ 0 $ 40,395 $ 0 $ 40,395
======= ======== ========= ========
Inventory Reserves (b) ................... $ 0 $152,578 $ 70,578(e) $ 82,000
======= ======== ========= ========
Added to liability accounts:
Warranty Reserves (c) .................... $ 0 $ 50,000 $ 0 $ 50,000
======= ======== ========= ========
</TABLE>
- ---------
(a) Represents an allowance for both product returns and doubtful accounts.
Activity represents doubtful accounts only. Revenues have been reduced
directly for product returns.
(b) Represents an allowance for excess and aging inventory and lower of cost or
market adjustments.
(c) Represents an allowance for estimated costs to be incurred under warranty
obligations.
(d) Represents costs incurred to fulfill warranty claims.
(e) Represents inventory items written down to lower of cost or market.
(f) Represents uncollectible accounts written off.
F-23
<PAGE>
APPENDIX A
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (the "PLAN"), dated as of July 31, 1998,
is among Cardiovascular Diagnostics, Inc., a North Carolina corporation
("CVDI"), Pharmanetics, Inc., a North Carolina corporation and wholly owned
subsidiary of CVDI ("PHARMANETICS") and CVDI Merger Corporation, a North
Carolina corporation and wholly owned subsidiary of Pharmanetics ("MERGER
SUB"). CVDI and Merger Sub are hereinafter collectively referred to as the
"CONSTITUENT CORPORATIONS" and individually as a "CONSTITUENT CORPORATION".
1. THE MERGER. At the Effective Time (as hereinafter defined), Merger Sub
shall be merged with and into CVDI (the "MERGER"), the separate corporate
existence of Merger Sub shall thereupon cease, and CVDI shall be the surviving
corporation in the Merger (the "SURVIVING CORPORATION"). The name of the
Surviving Corporation shall be Cardiovascular Diagnostics, Inc. The Merger
shall be effected pursuant to the provisions of and shall have the effect
provided by the Business Corporation Act of the State of North Carolina (the
"BCA").
2. ARTICLES OF INCORPORATION AND BYLAWS. On and subsequent to the
Effective Time, the Articles of Incorporation and Bylaws of CVDI in effect
immediately prior to the Effective Time shall continue to be the Articles of
Incorporation and Bylaws of the Surviving Corporation, until duly amended in
accordance with the terms thereof and the BCA.
3. EFFECT OF THE MERGER. At the Effective Time, the corporate existence
of Merger Sub shall cease, as provided in the BCA, and be merged into the
Surviving Corporation, and the Surviving Corporation shall be deemed to
continue as an entity and identity separate of each of the Constituent
Corporations. The Surviving Corporation shall, from and after the Effective
Time, possess all the rights, privileges, powers and franchises of whatsoever
nature and description, as well as a public or private nature, and be subject
to all the restrictions, liabilities and duties of each of the Constituent
Corporations; and all rights, privileges, powers and franchises of each of the
Constituent Corporations, and all property, tangible and intangible, real,
personal and mixed, and debts due to either of the Constituent Corporations on
whatever account as well for stock subscriptions as all other things in action
or belonging to each of the Constituent Corporations shall be vested in the
Surviving Corporation; and all property, rights, privileges, powers and
franchises, and all and every other interest shall be thereafter as effectively
the property of the Surviving Corporation as they were of the Constituent
Corporations prior to the Merger, and the title to any real estate vested by
deed or otherwise in any of the Constituent Corporations shall not revert or be
in any way impaired by reason of the Merger. All rights of creditors and all
liens upon the property of the Constituent Corporations shall be preserved
unimpaired, and all debts, liabilities and duties of the Constituent
Corporations shall thenceforth attach to the Surviving Corporation, and may be
enforced against it to the same extent as if said debts, liabilities and duties
had been incurred or contracted by it. Any claim existing or action or
proceeding, whether civil, criminal or administrative, pending by or against
either Constituent Corporation may be prosecuted to judgment or decree as if
the Merger had not taken place, or the Surviving Corporation may be substituted
in such action or proceeding.
4. CONVERSION AND EXCHANGE OF SHARES. At the Effective Time, the manner
and basis of converting and exchanging shares of the capital stock of the
Constituent Corporations shall be as follows:
4.1 STOCK OF MERGER SUB. Each one (1) share of Merger Sub Common Stock
issued and outstanding immediately prior to the Effective Time shall
thereupon, without any action on the part of the holder thereof or the
Constituent Corporations, be changed and converted into and become one (1)
fully paid and nonassessable share of the Common Stock of the Surviving
Corporation.
4.2 STOCK OF PHARMANETICS. Each share of Pharmanetics Common Stock
issued and outstanding immediately prior to the Effective Time shall be
cancelled and returned to the status of authorized but unissued shares.
4.3 STOCK OF CVDI. Upon and by reason of the Merger becoming effective,
each share of CVDI Common Stock issued and outstanding immediately prior to
the Effective Time shall thereupon, without any action on the part of the
holder thereof or the Constituent Corporations, be converted into and
become the right to receive one (1) share of the Common Stock of
Pharmanetics.
5. STOCK CERTIFICATES. After the Effective Time, each holder of an
outstanding certificate or certificates which prior thereto represented shares
of the Common Stock of CVDI may surrender the same, and such holder shall be
entitled, upon such surrender, to receive in exchange therefor a certificate or
certificates representing the number of whole shares of Pharmanetics Common
Stock, into and for which the shares of CVDI Common Stock so surrendered shall
have been converted and exchanged as provided above. Until a certificate which
represented shares of CVDI Common Stock prior to the
A-1
<PAGE>
Effective Time and which is held by a person entitled to receive CVDI Common
Stock is surrendered, such certificate shall evidence for all purposes the
ownership of shares of Pharmanetics Common Stock into which the shares of CVDI
Common Stock represented by such certificate prior to the Effective Time have
been converted as provided above.
6. STOCK OPTIONS. On the Effective Time, CVDI hereby assigns, delegates
and transfers to Pharmanetics, and Pharmanetics hereby assumes and continues:
(i) all of CVDI's stock option plans (including, without limitation, all of
CVDI's rights, title, interests, remedies, powers, obligations and duties under
such stock option plans) in existence on the Effective Time, and (ii) the
outstanding and unexercised portions of all outstanding options to purchase
CVDI Common Stock (including, without limitation, all of CVDI's rights, title,
interests, remedies, powers, obligations and duties under such stock options),
whether granted under any such stock option plan or otherwise. The outstanding
and unexercised portions of all options to purchase CVDI Common Stock,
including without limitation all options outstanding under CVDI's stock option
plans and any other outstanding stock options shall, as of the Effective Time,
become options to purchase the number of shares of Pharmanetics Common Stock
equal to the number of shares of CVDI Common Stock subject to such option with
no other changes in terms or conditions, unless such changes shall be required
to maintain the tax qualified status of incentive stock options under the
Internal Revenue Code of 1986, as amended (the "CODE"). Consistent with the
provisions of the Code and the regulations, Pharmanetics may, in its
discretion, grant new options to purchase shares of Pharmanetics Common Stock
under the continued stock plans or otherwise, in the stead of CVDI Common Stock
as if Pharmanetics had been the creator of CVDI's stock option plans and stock
options, and Pharmanetics shall be substituted for and have all the obligations
and liabilities of CVDI under such continued stock plans and stock options.
Pharmanetics Common Stock shall be substituted for CVDI Common Stock on a
1-for-1 basis as to any options granted by Pharmanetics pursuant to the
continued stock plans or otherwise subsequent to the Effective Time. It is the
intention of the parties hereto that while the benefits of CVDI's stock option
plans and stock options shall be preserved for the employees of CVDI, the
assumption of such stock option plans and the outstanding and unexercised
portions of all options to purchase CVDI Common Stock by Pharmanetics shall not
confer any additional benefits on the holders of options granted under the
stock option plans or otherwise, whether now outstanding or hereafter granted.
7. OFFICERS AND DIRECTORS. The officers of the Surviving Corporation at
and as of the Effective Time shall consist of all the persons who are officers
of CVDI immediately prior to the Effective Time until their successors have
been duly elected or appointed and qualified in accordance with the Surviving
Corporation's Articles of Incorporation and Bylaws. The Board of Directors of
the Surviving Corporation at and as of the Effective Time shall consist of all
the persons who are directors of CVDI immediately prior to the Effective Time
until their successors have been duly elected or appointed and qualified in
accordance with the Surviving Corporation's Articles of Incorporation and
Bylaws.
8. RATIFICATION BY SHAREHOLDERS. This Plan shall be submitted to the
shareholders of each of the Constituent Corporations for approval in accordance
with applicable laws and the respective Articles of Incorporation and Bylaws of
the Constituent Corporations. CVDI, Merger Sub, and Pharmanetics shall proceed
expeditiously and cooperate fully in the procurement of any other consents and
approvals and the taking of any other action, and the satisfaction of all other
requirements prescribed by law or otherwise, necessary for consummation of the
Merger on the terms herein provided.
9. TERMINATION. If for any reason the consummation of the Merger is
inadvisable in the opinion of the Boards of Directors of CVDI , Merger Sub or
Pharmanetics, this Plan may be terminated at any time before the Effective Time
by notice by one or more party to the other. Upon termination by notice as
provided in this Section, this Plan shall be void and of no further force or
effect.
10. EFFECTIVE TIME. The Merger shall become effective, and the Effective
Time of the Merger shall occur upon filing of the Articles of Merger with the
North Carolina Secretary of State.
A-2
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed as of this 31st day of July
1998.
CARDIOVASCULAR DIAGNOSTICS, INC.
By: /s/ JOHN P. FUNKHOUSER
------------------------------------
JOHN P. FUNKHOUSER,
PRESIDENT AND CHIEF EXECUTIVE OFFICER
CVDI MERGER CORPORATION
By: /s/ JOHN P. FUNKHOUSER
------------------------------------
JOHN P. FUNKHOUSER,
PRESIDENT AND CHIEF EXECUTIVE OFFICER
PHARMANETICS INC.
By: /s/ JOHN P. FUNKHOUSER
------------------------------------
JOHN P. FUNKHOUSER,
PRESIDENT AND CHIEF EXECUTIVE OFFICER
A-3
<PAGE>
APPENDIX B
ARTICLES OF INCORPORATION
OF
PHARMANETICS, INC.
The undersigned, pursuant to Section 55-2-02 of the North Carolina General
Statutes, does hereby submit these Articles of Incorporation for the purpose of
forming a business corporation under and by virtue of the laws of the State of
North Carolina.
1. The name of the corporation is PharmaNetics, Inc.
2. The corporation shall have authority to issue 11,000,000 shares, no
par value per share, of which 10,000,000 shares shall be designated "Common
Stock" and 1,000,000 shall be designated "Preferred Stock". The Board of
Directors of the corporation is authorized to determine or alter the rights,
preferences, privileges and restrictions granted to or imposed upon any wholly
unissued series of Preferred Stock, and within the limitations and restrictions
stated in any resolution or resolutions of the Board originally fixing the
number of shares constituting any series, to increase or decrease (but not
below the number of shares of any such series then outstanding) the number of
shares of any such series subsequent to the issue of shares of that series, to
determine the designation of any series and to fix the number of shares of any
series.
3. The street address and county of the initial registered office of the
corporation are 5301 Departure Drive, Raleigh, Wake County, North Carolina
27616 and the name of the initial registered agent at such address is Paul T.
Storey. The mailing address of the initial registered office of the corporation
is the same as its street address.
4. The name and address of the incorporator are:
<TABLE>
<CAPTION>
NAME ADDRESS
- ------------------- ---------------------------------
<S> <C>
Kevin A. Prakke 4101 Lake Boone Trail, Suite 300
Raleigh, NC 27607
</TABLE>
5. Except to the extent that the North Carolina General Statutes prohibit
such limitation or elimination of liability of directors for breaches of duty,
no director of the corporation shall be liable to the corporation or to any of
its shareholders for monetary damages for breach of duty as a director. No
amendment to or repeal of this provision or adoption of a provision
inconsistent herewith shall apply to or have any effect on the liability or
alleged liability of any director of the corporation for or with respect to any
acts or omissions of such director occurring prior to such amendment or repeal
or adoption of an inconsistent provision. The provisions of this Article shall
not be deemed to limit or preclude indemnification of a director by the
corporation for any liability that has not been eliminated by the provisions of
this Article.
IN WITNESS WHEREOF, I have executed these Articles of Incorporation this
13th day of July 1998.
/s/ KEVIN A. PRAKKE
----------------------------------------
KEVIN A. PRAKKE, INCORPORATOR
B-1
<PAGE>
APPENDIX C
BYLAWS OF
PHARMANETICS, INC.
I. OFFICES
1.1 PRINCIPAL OFFICE. The principal office of the corporation shall be
located in Raleigh, North Carolina or in such place as the Board of Directors
may fix from time to time.
1.2 REGISTERED OFFICE. The registered office of the corporation required
by law to be maintained in the State of North Carolina may be, but need not be,
identical with the principal office.
1.3 OTHER OFFICES. The corporation may have offices at such other places,
either within or without the State of North Carolina, as the Board of Directors
may designate or as the affairs of the corporation may require from time to
time.
II. MEETINGS OF SHAREHOLDERS
2.1 PLACE OF MEETINGS. All meetings of shareholders shall be held at the
principal office of the corporation, or at such other place, whether within or
without the State of North Carolina, as shall be designated in the notice of
the meeting or agreed upon by the Board of Directors.
2.2 ANNUAL MEETING. The annual meeting of shareholders shall be held
during May of each year at a time and on any day (except Saturday, Sunday or a
legal holiday) determined by the Board of Directors for the purpose of electing
directors of the corporation and for the transaction of such other business as
may be properly brought before the meeting. If the required day of the annual
meeting falls on a federal or state holiday, the annual meeting shall be held
instead on the next business day at a time determined by the board of
directors.
2.3 SUBSTITUTE ANNUAL MEETINGS. If the annual meeting shall not be held on
the day designated by these bylaws, a substitute annual meeting may be called
in accordance with the provisions of Section 4 of this Article II. A meeting so
called shall be designated and treated for all purposes as the annual meeting.
2.4 SPECIAL MEETINGS. Special meetings of the shareholders may be called
at any time by the President, Secretary or Board of Directors of the
Corporation, or by any shareholder pursuant to the written request of the
holders of not less than one-tenth of all shares entitled to vote at the
meeting.
2.5 NOTICE OF MEETINGS. Written or printed notice stating the time and
place of any shareholders' meeting shall be delivered not less than ten (10)
nor more than sixty (60) days before the date of such meeting, either
personally or by telegraph, teletype or other form of wire or wireless
communication, or by facsimile, by or at the direction of the Chairman of the
Board, the President, the Secretary or other person calling the meeting, to
each shareholder of record entitled to vote at such meeting; provided that such
notice must be given to all shareholders with respect to any meeting at which a
merger, share exchange, sale of assets other than in the regular course of
business or voluntary dissolution is to be considered and in such other
instances as required by law. If mailed, such notice shall be deemed to be
delivered when deposited in the United States mail, addressed to the
shareholder at his or her address as it appears on the record of shareholders
of the corporation, with postage thereon prepaid.
In the case of a special meeting, the notice of meeting shall specifically
state the purpose or purposes for which the meeting is called; but, in the case
of an annual or substitute annual meeting, the notice of meeting need not
specifically state the business to be transacted thereat unless such a
statement is required by the provisions of the North Carolina Business
Corporation Act.
When a meeting is adjourned to a different date, time or place, notice
need not be given of the new date, time or place if the new date, time or place
is announced at the meeting before adjournment. If, however, a new record date
for the adjourned meeting is fixed, notice of the adjourned meeting will be
given to all persons who are shareholders as of the new record date in
accordance with this Section 5.
2.6 WAIVER OF NOTICE. Any shareholder may waive notice of any meeting. The
waiver must be in writing, signed by the shareholder and delivered to the
corporation for inclusion in the minutes or filing with the corporate records.
A shareholder's attendance at a meeting (a) waives objection to lack of notice
or defective notice of the meeting, unless the shareholder
C-1
<PAGE>
at the beginning of the meeting objects to holding the meeting or transacting
business at the meeting; and (b) waives objection to consideration of a
particular matter at the meeting that is not within the purpose or purposes
described in the meeting notice, unless the shareholder objects to considering
the matter before it is voted upon.
2.7 SHAREHOLDER LISTS. Before each meeting of shareholders, the Secretary
of the corporation shall prepare an alphabetical list of the shareholders
entitled to notice of such meeting. The list shall be arranged by voting group
(and within each voting group by class or series of shares) and show the
address and number of shares held by each shareholder. The list shall be kept
on file at the principal office of the corporation, or at a place identified in
the meeting notice in the city where the meeting will be held, for the period
beginning two business days after notice of the meeting is given and continuing
through the meeting, and shall be subject to inspection by any shareholder at
any time during regular business hours. This list shall also be produced and
kept open at the time and place of the meeting and shall be subject to
inspection by any shareholder during the meeting or any adjournment thereof.
2.8 QUORUM. A majority of the outstanding shares of the corporation
entitled to vote, represented in person or by proxy, shall be required for, and
shall constitute a quorum at all meetings of shareholders. Shares entitled to
vote as a separate voting group may take action on a matter only if a quorum of
those shares exists; a majority of the votes entitled to be cast on the matter
by the voting group constitutes a quorum of that voting group. The shareholders
present at a duly organized meeting may continue to do business until
adjournment, notwithstanding the withdrawal of enough shareholders to leave
less than a quorum.
In the absence of a quorum at the opening of any meeting of shareholders,
such meeting may be adjourned from time to time by a vote of a majority of the
shares voting on the motion to adjourn; and at any adjourned meeting at which a
quorum is present, any business may be transacted which might have been
transacted at the original meeting.
2.9 ORGANIZATION. Each meeting of shareholders shall be presided over by
the Chairman of the Board, and in his or her absence or at his or her request
by the President, and in their absence or at their request by any person
selected to preside by vote of the holders of a majority of the shares present
and entitled to vote at the meeting. The Secretary, or in his or her absence or
at his or her request, any person designated by the person presiding at the
meeting, shall act as Secretary of the meeting.
2.10 PROXIES. Shares may be voted either in person or by one or more
agents authorized by a written proxy executed by the shareholder or by his or
her duly authorized attorney in fact. A proxy is not valid after the expiration
of eleven months from the date of its execution, unless the person executing it
specifies therein the length of time for which it is to continue in force, or
limits its use to a particular meeting. Any proxy shall be revocable by the
shareholder unless the written appointment expressly and conspicuously provides
that it is irrevocable and the appointment is coupled with an interest as
required by law.
2.11 VOTING OF SHARES. Subject to the provisions of Section 4 of Article
III and the corporation's Articles of Incorporation, each outstanding share
entitled to vote shall be entitled to one vote on each matter submitted to a
vote at a meeting of shareholders. All shares entitled to vote and be counted
together collectively on a matter as provided by the Articles of Incorporation
or by the North Carolina Business Corporation Act shall constitute a single
voting group. Additional required voting groups shall be determined in
accordance with the charter and bylaws of this corporation and the North
Carolina Business Corporation Act.
Except in the election of directors as governed by the provisions of
Section 3 of Article III, the vote of a majority of the shares voted on any
matter at a meeting of shareholders at which a quorum is present shall be the
act of the shareholders on that matter, unless the vote of a greater number is
required by law or by the charter or bylaws of this corporation. Further,
except in the election of directors, action on a matter by a voting group shall
be approved if the votes cast within the voting group favoring the action
exceed the votes cast opposing the action, unless the vote by a greater number
is required by law or by the charter or bylaws of this corporation. Corporate
action on such matters shall be taken only when approved by each and every
voting group entitled to vote as a separate voting group on such matters as
provided by the charter or bylaws of this corporation or by the North Carolina
Business Corporation Act.
Voting on all matters except the election of directors shall be by voice
vote or by a show of hands unless the holders of one-tenth of the shares
represented at the meeting shall, prior to the voting on any matter, demand a
ballot vote on that particular matter. Abstentions shall not be treated as
negative votes.
Shares of the corporation's stock are not entitled to vote if they are
owned, directly or indirectly, by a second corporation and the corporation
owns, directly or indirectly, a majority of the shares entitled to vote for
directors of the second corporation, except that shares held in a fiduciary
capacity, including the corporation's own shares, may be voted.
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2.12 INFORMAL ACTION BY SHAREHOLDERS. Any action which is required or
permitted to be taken at a meeting of the shareholders may be taken without a
meeting if one or more written consents, describing the action so taken, shall
be signed by all of the persons who would be entitled to vote upon such action
at a meeting, and delivered to the corporation for inclusion in the minutes or
filing with the corporate records. Such consent shall have the same force and
effect as a unanimous vote of shareholders. Any shareholder may retract his or
her consent until the last shareholder entitled to vote has signed the
appropriate written consent and all consents have been delivered to the
Secretary of the corporation. When notice of a proposed action is required to
be given to nonvoting shareholders as provided in Section 5 of Article II of
these bylaws, the corporation shall give the nonvoting shareholders notice at
least ten (10) days before action is taken in lieu of a meeting by unanimous
consent of the voting shareholders. Such notice to nonvoting shareholders shall
contain or be accompanied by any material that would have been required to be
sent to the nonvoting shareholders in a notice of meeting at which the proposed
action would have been submitted to the shareholders for action.
2.13 SHAREHOLDER PROPOSALS. Any shareholder wishing to bring any business
before a meeting of shareholders must provide notice to the corporation not
more than ninety (90) and not less than fifty (50) days before the meeting in
writing by registered mail, return receipt requested, of the business to be
presented by such shareholder at the shareholder's meeting. Any such notice
shall set forth the following as to each matter the shareholder proposes to
bring before the meeting: (i) a brief description of the business desired to be
brought before the meeting and the reasons for conducting such business at the
meeting and, if such business includes a proposal to amend the bylaws of the
corporation, the language of the proposed amendment; (ii) the name and address,
as they appear on the corporation's books, of the shareholder proposing such
business; (iii) the class and number of shares of the corporation which are
beneficially owned by such shareholder; (iv) a representation that the
shareholder is a holder of record of stock of the corporation entitled to vote
at such meeting and intends to appear in person or by proxy at the meeting to
propose such business; and (v) any material interest of the shareholder in such
business. Notwithstanding the foregoing provisions of this Section, a
shareholder shall also comply with all applicable requirements of the
Securities Exchange Act of 1934, as amended, and the rules and regulations
thereunder with respect to the matters set forth in this Section. In the
absence of such notice to the corporation meeting the above requirements, a
shareholder shall not be entitled to present any business at any meeting of the
shareholders.
2.14 INSPECTORS OF ELECTION.
(a) APPOINTMENT OF INSPECTORS OF ELECTION. In advance of any meeting of
shareholders, the Board of Directors may appoint any persons, other than
nominees for office, as inspectors of election to act at such meeting or any
adjournment thereof. If inspectors of election are not so appointed, the
chairman of any such meeting may appoint inspectors of election at the meeting.
The number of inspectors shall be either one or three. In case any person
appointed as inspector fails to appear or fails or refuses to act, the vacancy
may be filled by appointment by the Board of Directors in advance of the
meeting or at the meeting by the person acting as chairman.
(b) DUTIES OF INSPECTORS. The inspectors of election shall determine the
number of shares outstanding and the voting power of each, the shares
represented at the meeting, the existence of a quorum, the authenticity,
validity and effect of proxies, receive votes, ballots or consents, hear and
determine all challenges and questions in any way arising in connection with
the right to vote, count and tabulate all votes or consents, determine the
result and do such acts as may be proper to conduct the election or vote with
fairness to all shareholders. The inspectors of election shall perform their
duties impartially, in good faith, to the best of their ability and as
expeditiously as is practical.
(c) VOTE OF INSPECTORS. If there are three inspectors of election, the
decision, act or certificate of a majority shall be effective in all respects
as the decision, act or certificate of all.
(d) REPORT OF INSPECTORS. On a request of the chairman of the meeting, the
inspectors shall make a report in writing of any challenge or question or
matter determined by them and shall execute a certificate of any fact found by
them. Any report or certificate made by them shall be a prima facie evidence of
the facts stated therein.
III. BOARD OF DIRECTORS
3.1 GENERAL POWERS. All corporate powers shall be exercised by or under
the authority of, and the business and affairs of the corporation managed under
the direction of, its Board of Directors or by such executive or other
committees as the Board may establish pursuant to these bylaws.
3.2 NUMBER AND QUALIFICATIONS. The number of directors constituting the
Board of Directors shall be not more than nine (9) but not less than one (1),
and may be fixed or changed, within this minimum and maximum, by the
shareholders or the
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Board of Directors. The number of directors constituting the initial Board of
Directors shall be fixed at one (1). Directors need not be residents of the
State of North Carolina or shareholders of the corporation.
3.3 ELECTION OF DIRECTORS. Except as provided in Section 6 of this Article
III, the directors shall be elected at the annual meeting of shareholders; and
those persons who receive the highest number of votes shall be deemed to have
been elected. Every shareholder entitled to vote at an election of directors
shall have the right to vote the number of shares standing of record in his or
her name for as many persons as there are directors to be elected and for whose
election he or she has a right to vote, or, if cumulative voting rights have
been provided for in the corporation's Articles of Incorporation, to cumulate
his or her vote by giving one candidate as many votes as the number of such
directors multiplied by the number of his or her shares shall equal, or by
distributing such votes on the same principle among any number of such
candidates. This right of cumulative voting, if available to the shareholders,
shall not be exercised unless (a) the meeting notice or proxy statement
accompanying the notice states conspicuously that shareholders are entitled to
cumulate their votes, or (b) a shareholder or proxy holder who has the right to
cumulate his or her votes announces in open meeting, before the voting for the
directors starts, his or her intention so to vote cumulatively; and if such
announcement is made, the chair shall declare that all shares entitled to vote
have the right to vote cumulatively and shall announce the number of shares
present in person and by proxy and shall thereupon grant a recess of not less
than one nor more than four hours, as he or she shall determine, or of such
other period of time as is unanimously then agreed upon.
3.4 TERM OF DIRECTORS. Each initial director shall hold office until the
first shareholders' meeting at which directors are elected, or until such
director's death, resignation or removal. The terms of every other director
shall expire at the next annual shareholders' meeting following a director's
election or upon such director's death, resignation or removal. The term of a
director elected to fill a vacancy expires at the next shareholders' meeting at
which directors are elected. Despite the expiration of a director's term, such
director shall continue to serve until a qualified successor shall be elected.
A decrease in the number of directors does not shorten an incumbent director's
term.
3.5 REMOVAL. Any director may be removed at any time with or without cause
by a vote of the shareholders if the number of votes cast to remove such
director exceeds the number of votes cast not to remove him or her. However, if
cumulative voting is authorized, a director shall not be removed when the
number of shares voting against the proposal for removal would be sufficient to
elect a director if such shares were voted cumulatively at an annual election.
If a director is elected by a voting group of shareholders, only the
shareholders of that voting group may participate in the vote to remove him or
her. If any directors are so removed, new directors may be elected at the same
meeting. A director may not be removed by the shareholders at a meeting unless
the notice of the meeting states that the purpose, or one of the purposes, of
the meeting, is removal of the director.
3.6 VACANCIES. Any vacancy occurring in the Board of Directors, including,
without limitation, a vacancy resulting from an increase in the number of
directors or from the failure by the shareholders to elect the full authorized
number of directors, may be filled by the shareholders or the Board of
Directors, whichever group shall act first. If the directors remaining in
office do not constitute a quorum of the Board, the directors may fill the
vacancy by the affirmative vote of a majority of the remaining directors.
3.7 CHAIRMAN OF THE BOARD. There may be a Chairman of the Board of
Directors elected by the directors from their number at any meeting of the
Board. The Chairman shall preside at all meetings of the Board of Directors and
perform such other duties as may be directed by the Board. Until a Chairman is
elected, the President of the corporation shall preside at the meetings of the
Board of Directors and shareholders.
3.8 COMPENSATION. The Board of Directors, in its discretion, may
compensate directors for their services as such and may provide for the payment
of all expenses incurred by directors in attending regular and special meetings
of the Board or of the Executive Committee. Nothing herein contained, however,
shall be construed to preclude any director from serving the corporation in any
other capacity and receiving compensation therefor.
3.9 EXECUTIVE COMMITTEES. The Board of Directors, by resolution adopted by
a majority of the number of directors in office when the action is taken or, if
greater, the number of directors required to take action pursuant to Section 6
of Article IV, may designate two or more directors to constitute an Executive
Committee and other committees, each of which, to the extent authorized by law
and provided in such resolution, shall have and may exercise all of the
authority of the Board of Directors in the management of the corporation. Each
committee member serves at the pleasure of the Board of Directors. The
provisions in these bylaws that govern meetings, action without meetings,
notice and waiver of notice, and quorum and voting requirements of the Board of
Directors apply to committees established by the Board.
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IV. MEETINGS OF DIRECTORS
4.1 REGULAR MEETINGS. A regular meeting of the Board of Directors shall be
held immediately after, and at the same place as, the annual meeting of
shareholders. In addition, the Board of Directors may provide, by resolution,
the time and place, either within or without the State of North Carolina, for
the holding of additional regular meetings.
4.2 SPECIAL MEETINGS. Special meetings of the Board of Directors may be
called by or at the request of the Chairman of the Board of Directors, if any,
by the President or any two directors. Such meetings may be held either within
or without the State of North Carolina, as fixed by the person or persons
calling the meeting.
4.3 NOTICE OF MEETINGS. The person or persons calling a special or regular
meeting of the Board of Directors shall, at least two days before the meeting,
give notice thereof by any usual means of communication. Such notice need not
specify the purpose for which the meeting is called in the case of a regular
meeting, but shall specify the purpose in the case of a special meeting.
4.4 WAIVER OF NOTICE. Any director may waive notice of any meeting. The
waiver must be in writing, signed by the director entitled to the notice and
delivered to the corporation for inclusion in the minutes or filing with the
corporate records. A director's attendance at or participation in a meeting
shall constitute a waiver of notice of such meeting, unless the director at the
beginning of the meeting (or promptly on arrival) objects to holding the
meeting or transacting business at the meeting and does not thereafter vote for
or assent to action taken at the meeting.
4.5 QUORUM. A majority of the directors fixed by these bylaws shall be
required for, and shall constitute, a quorum for the transaction of business at
any meeting of the Board of Directors unless the charter or these bylaws
provide otherwise.
4.6 MANNER OF ACTING. Except as otherwise provided in the charter or these
bylaws, the act of the majority of the directors present at a meeting at which
a quorum is present shall be the act of the Board of Directors.
4.7 PRESUMPTION OF ASSENT. A director of the corporation who is present at
a meeting of the Board of Directors or a committee of the Board of Directors
when corporate action is taken is deemed to have assented to the action taken
unless (a) he objects at the beginning of the meeting (or promptly upon his or
her arrival) to holding it or transacting business at the meeting, or (b) his
or her dissent or abstention from the action taken is entered in the minutes of
the meeting, or (c) he or she files written notice of his or her dissent or
abstention with the presiding officer of the meeting before its adjournment or
with the corporation immediately after the adjournment. Such right to dissent
shall not apply to a director who voted in favor of such action.
4.8 ACTION WITHOUT MEETING. Action required or permitted to be taken at a
meeting of the Board of Directors may be taken without a meeting if the action
is taken by all members of the Board. The action must be evidenced by one or
more written consents signed by each director before or after such action,
describing the action taken, and included in the minutes or filed with the
corporate records. Such action will become effective when the last director
signs the consent, unless the consent specifies a different date.
4.9 CONFERENCE TELEPHONE MEETINGS. Any one or more directors or members of
a committee may participate in a meeting of the Board of Directors or committee
by means of a conference telephone or similar communications device which
allows all persons participating in the meeting to hear each other, and such
participation in a meeting shall be deemed presence in person at such meeting.
V. OFFICERS
5.1 OFFICERS OF THE CORPORATION. The officers of the corporation shall
consist of a Chairman of the Board, President, a Secretary, a Treasurer and
such Vice Presidents, Assistant Secretaries, Assistant Treasurers, and other
officers (including Controllers and Assistant Controllers) as the Board of
Directors may from time to time elect. Any two or more offices may be held by
the same person, but no officer may act in more than one capacity where action
of two or more officers is required.
5.2 APPOINTMENT AND TERM. The officers of the corporation shall be
appointed by the Board of Directors and each officer shall hold office until
his or her death, resignation, retirement, removal, disqualification, or his or
her successor shall have been appointed and qualified.
5.3. REMOVAL. Any officer or agent elected or appointed by the Board of
Directors may be removed by the Board at any time with or without cause; but
such removal shall be without prejudice to the contract rights, if any, of the
person so removed.
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5.4 RESIGNATION. An officer may resign at any time by communicating his or
her resignation to the corporation, orally or in writing. A resignation is
effective when communicated unless it specifies in writing a later effective
date. If a resignation is made effective at a later date which is accepted by
the corporation, the Board of Directors may fill the pending vacancy before the
effective date if the Board provides that the successor does not take office
until the effective date. An officer's resignation does not affect the
corporation's contract rights, if any, with the officer.
5.5 COMPENSATION OF OFFICERS. The compensation of all officers of the
corporation shall be fixed by the Board of Directors and no officer shall serve
the corporation in any other capacity and receive compensation therefor unless
such additional compensation be authorized by the Board of Directors.
5.8 PRESIDENT. The President shall be the Chief Executive Officer of the
corporation (and may be identified as such by his or her title) and, subject to
the control of the Board of Directors, shall in general supervise and control
all of the business and affairs of the corporation. He or she shall, in the
absence of the Chairman of the Board, preside at all meetings of the
shareholders. He or she shall sign, with the Secretary, an Assistant Secretary,
or any other proper officer of the corporation thereunto authorized by the
Board of Directors, certificates for shares of the corporation, any deeds,
mortgages, bonds, contracts, or other instruments which the Board of Directors
has authorized to be executed, except in cases where the signing and execution
thereof shall be expressly delegated by the Board of Directors or by these
bylaws to some other officer or agent of the corporation, or shall be required
by law to be, otherwise signed or executed; and, in general, he or she shall
perform all duties incident to the office of President and such other duties as
may be prescribed by the Board of Directors from time to time.
5.9 VICE PRESIDENTS. In the absence of the President or in the event of
his or her death, inability or refusal to act, the Vice Presidents in the order
of their length of service as such, unless otherwise determined by the Board of
Directors, shall perform the duties of the President, and when so acting shall
have all the powers of and be subject to all the restrictions upon the
President. Any Vice President may sign, with the Secretary or an Assistant
Secretary, certificates of shares of the corporation; and shall perform such
other duties as from time to time may be assigned to him or her by the
President or Board of Directors. The Board of Directors may designate one or
more Vice Presidents to be responsible for certain functions, including,
without limitation, Marketing, Finance, Manufacturing and Personnel.
5.10 SECRETARY. The Secretary shall: (a) keep the minutes of the meetings
of shareholders, of the Board of Directors and of all Executive Committees in
one or more books provided for that purpose; (b) see that all notices are duly
given in accordance with the provisions of these bylaws or as required by law;
(c) be custodian of the corporate records and of the seal of the corporation
and see that the seal of the corporation is affixed to all documents the
execution of which on behalf of the corporation under its seal is duly
authorized; (d) keep a register of the post office address of each shareholder
which shall be furnished to the Secretary by such shareholder; (e) sign with
the President, or a Vice President, certificates for shares of the corporation,
the issuance of which shall have been authorized by resolution of the Board of
Directors; (f) maintain and have general charge of the stock transfer books of
the corporation; (g) prepare or cause to be prepared shareholder lists prior to
each meeting of shareholders as required by law; (h) attest the signature or
certify the incumbency or signature of any officer of the corporation; and (i)
in general perform all duties incident to the office of Secretary and such
other duties as from time to time may be assigned to him or her by the
President or by the Board of Directors.
5.11 ASSISTANT SECRETARIES. In the absence of the Secretary or in the
event of his or her death, inability or refusal to act, the Assistant
Secretaries in the order of their length of service as Assistant Secretary,
unless otherwise determined by the Board of Directors, shall perform the duties
of the Secretary, and when so acting shall have all the powers of and be
subject to all the restrictions upon the Secretary. They shall perform such
other duties as may be assigned to them by the Secretary, by the President, or
by the Board of Directors. Any Assistant Secretary may sign, with the President
or a Vice President, certificates for shares of the corporation.
5.12 TREASURER. Unless otherwise designated by resolution of the Board,
the Treasurer shall be the Chief Financial Officer of the corporation (and may
be designated as such in his or her or her title) and, subject to the
discretion of the Board of Directors, shall: (a) have charge and custody of and
be responsible for all funds and securities of the corporation; receive and
give receipts for monies due and payable to the corporation from any source
whatsoever, and deposit all such monies in the name of the corporation in such
depositories as shall be selected in accordance with the provisions of Section
4 of Article VI of these bylaws; (b) maintain appropriate accounting records as
required by law; (c) prepare, or cause to be prepared, annual financial
statements of the corporation that include a balance sheet as of the end of the
fiscal year (unless that information appears elsewhere in the financial
statements) and an income and cash flow statement for that year, which
statements, or a written notice of their availability, shall be mailed to each
shareholder within 120 days after the end of such
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fiscal year; and (d) in general perform all of the duties incident to the
office of Treasurer and such other duties as from time to time may be assigned
to him or her by the President or by the Board of Directors, or by these
bylaws.
5.13 ASSISTANT TREASURERS. In the absence of the Treasurer or in the event
of his or her death, inability or refusal to act, the Assistant Treasurers in
the order of their length of service as such, unless otherwise determined by
the Board of Directors, shall perform the duties of the Treasurer, and when so
acting shall have all the powers of and be subject to all the restrictions upon
the Treasurer. They shall perform such other duties as may be assigned to them
by the Treasurer, by the President, or by the Board of Directors.
5.14 CONTROLLER AND ASSISTANT CONTROLLERS. The Controller, if one has been
appointed, shall have charge of the accounting affairs of the corporation and
shall have such other powers and perform such other duties as the Board of
Directors shall designate. Each Assistant Controller shall have such powers and
perform such duties as may be assigned by the Board of Directors and the
Assistant Controller shall exercise the powers of the Controller during that
officer's absence or inability to act.
5.15 DELEGATION OF DUTIES OF OFFICERS. In case of the absence of any
officer of the corporation or for any other reason that the Board may deem
sufficient, the Board may delegate the powers or duties of such officer to any
other officer or to any director for the time being provided a majority of the
entire Board of Directors concurs herein.
5.16 BONDS. The Board of Directors may by resolution, require any or all
officers, agents or employees of the corporation to give bond to the
corporation, with sufficient sureties, conditioned on the faithful performance
of the duties of their respective offices or positions, and to comply with such
other conditions as may from time to time be required by the Board of
Directors.
VI. CONTRACTS, LOANS, CHECKS AND DEPOSITS
6.1 CONTRACTS. The Board of Directors may authorize any officer or
officers, agent or agents, to enter into any contract or execute and deliver
any instrument in the name of and on behalf of the corporation, and such
authority may be general or confined to specific instances. Any resolution of
the Board of Directors authorizing the execution of documents by the proper
officers of the corporation or by the officers generally shall be deemed to
authorize such execution by the Chairman of the Board, the President, any Vice
President, or the Treasurer, or any other officer if such execution is
generally within the scope of the duties of his or her office. The Board of
Directors may by resolution authorize such execution by means of one or more
facsimile signatures.
6.2 CHECKS AND DRAFTS. All checks, drafts or other orders for the payment
of money issued in the name of the corporation shall be signed by such officer
or officers, agent or agents of the corporation and in such manner as shall
from time to time be determined by resolution of the Board of Directors.
6.3 DEPOSITS. All funds of the corporation not otherwise employed shall be
deposited from time to time to the credit of the corporation in such
depositories as the Board of Directors may select.
VII. CERTIFICATES FOR SHARES AND THEIR TRANSFER
7.1 CERTIFICATES FOR SHARES. The Board of Directors may authorize the
issuance of some or all of the shares of the corporation's classes or series
without issuing certificates to represent such shares. If shares are
represented by certificates, the certificates shall be in such form as required
by law and as shall be determined by the Board of Directors. Certificates shall
be signed (either manually or in facsimile) by the Chairman of the Board,
President or a Vice President and by the Secretary or Treasurer or an Assistant
Secretary or an Assistant Treasurer. The signatures of any such officers upon a
certificate may be facsimiles or may be engraved or printed. In case any
officer who has signed or whose facsimile or other signature has been placed
upon such certificate shall have ceased to be such officer before such
certificate is issued, it may be issued by the corporation with the same effect
as if he or she were such officer at the date of its issue. All certificates
for shares shall be consecutively numbered or otherwise identified and entered
into the stock transfer books of the corporation. When shares are represented
by certificates, the corporation shall issue and deliver to each shareholder to
whom such shares have been issued or transferred, certificates representing the
shares owned by him or her. When shares are not represented by certificates,
then within a reasonable time after the issuance or transfer of such shares,
the corporation shall send the shareholder to whom such shares have been issued
or transferred a written statement of the information required by law to be on
certificates.
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7.2 STOCK TRANSFER BOOKS. The corporation shall keep a book or set of
books, to be known as the stock transfer books of the corporation, containing
the name of each shareholder of record, together with such shareholder's
address and the number and class or series of shares held by him or her.
Transfer of shares shall be made only on the stock transfer books of the
corporation by the holder of record thereof or by his or her legal
representative, who shall furnish proper evidence of authority to transfer, or
by his or her attorney thereunto authorized by power of attorney duly executed
and filed with the Secretary, and on surrender for cancellation of the
certificate for such shares (if the shares are represented by certificates).
All certificates surrendered for transfer (if the shares are represented by
certificates) shall be cancelled before new certificates (or written statements
in lieu thereof) for the transferred shares shall be issued or delivered to the
shareholder.
7.3 FIXING RECORD DATE. The Board of Directors may fix a future date as
the record date for one or more voting groups in order to determine the
shareholders entitled to notice of or to vote at any meeting of shareholders or
any adjournment thereof, or entitled to receive payment of any distribution, or
in order to make a determination of shareholders for any other proper purpose.
Such record date may not be more than seventy days before the meeting or date
on which the particular action requiring such determination of shareholders is
to be taken. A determination of shareholders entitled to notice of or to vote
at a shareholders' meeting is effective for any adjournment of the meeting
unless the Board of Directors fixes a new record date for the adjourned
meeting, which it must do if the meeting is adjourned to a date more than 120
days after the date fixed for the original meeting.
If no record date is fixed for the determination of shareholders entitled
to notice of or to vote at a meeting of shareholders, or shareholders entitled
to receive payment of a distribution, the close of business on the day before
the first notice of the meeting is delivered to shareholders or the date on
which the resolution of the Board of Directors declaring such distribution is
adopted, as the case may be, shall be the record date for such determination of
shareholders.
7.4 LOST OR DESTROYED CERTIFICATE. The Board of Directors may direct a new
certificate to be issued in place of any certificate theretofore issued by the
corporation claimed to have been lost, destroyed or wrongfully taken, upon
receipt of an affidavit of such fact from the person claiming the certificate
of stock to have been lost or destroyed. When authorizing such issue of a new
certificate, the Corporation shall require that the owner of such lost or
destroyed certificate, or his or her legal representative, give the corporation
a bond in such sum as the Corporation may direct as indemnity, or an agreement
to indemnify the corporation, against any claim that may be made against the
Corporation with respect to the certificate claimed to have been lost or
destroyed.
7.5 HOLDER OF RECORD. Except as otherwise required by law, the corporation
may treat as absolute owner of shares the person in whose name the shares stand
of record on its books just as if that person had full competency, capacity and
authority to exercise all rights of ownership irrespective of any knowledge or
notice to the contrary or any description indicating a representative, pledge
or other fiduciary relation or any reference to any other instrument or to the
rights of any other person appearing upon its record or upon the share
certificate except that any person furnishing to the corporation proof of his
or her appointment as a fiduciary shall be treated as if he or she were a
holder of record of its shares.
7.6 SHARES HELD BY NOMINEES.
(a) The corporation shall recognize the beneficial owner of shares
registered in the name of a nominee as the owner and shareholder of such shares
for certain purposes if the nominee in whose name such shares are registered
files with the Secretary of the corporation a written certificate in a form
prescribed by the corporation, signed by the nominee and indicating the
following: (1) the name, address and taxpayer identification number of the
nominee; (2) the name, address and taxpayer identification number of the
beneficial owner; (3) the number and class or series of shares registered in
the name of the nominee as to which the beneficial owner shall be recognized as
the shareholder; and (4) the purposes for which the beneficial owner shall be
recognized as the shareholder.
(b) The purposes for which the corporation shall recognize a beneficial
owner as the shareholder may include the following: (1) receiving notice of,
voting at and otherwise participating in shareholders' meetings; (2) executing
consents with respect to the shares; (3) exercising dissenters' rights under
Article 13 of the North Carolina Business Corporation Act; (4) receiving
distributions and share dividends with respect to the shares; (5) exercising
inspection rights; (6) receiving reports, financial statements, proxy
statements and other communications from the corporation; (7) making any demand
upon the corporation required or permitted by law; and (8) exercising any other
rights or receiving any other benefits of a shareholder with respect to the
shares.
(c) The certificate shall be effective ten (10) business days after its
receipt by the corporation and until it is changed by the nominee, unless the
certificate specifies a later effective time or an earlier termination date.
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(d) If the certificate affects less than all of the shares registered in
the name of the nominee, the corporation may require the shares affected by the
certificate to be registered separately on the books of the corporation and be
represented by a share certificate that bears a conspicuous legend stating that
there is a nominee certificate in effect with respect to the shares represented
by that share certificate.
7.7 ACQUISITION BY CORPORATION OF ITS OWN SHARES. The corporation may
acquire its own shares and shares so acquired shall constitute authorized but
unissued shares. Unless otherwise prohibited by the Articles of Incorporation,
the corporation may reissue such shares. If reissue is prohibited, the Articles
of Incorporation shall be amended to reduce the number of authorized shares by
the number of shares so acquired. Such required amendment may be adopted by the
Board of Directors without shareholder action.
VIII. GENERAL PROVISIONS
8.1 DISTRIBUTIONS. The Board of Directors may from time to time authorize,
and the corporation may make distributions to its shareholders pursuant to law
and subject to the provisions of its charter.
8.2 SEAL. The corporate seal of the corporation shall consist of two
concentric circles between which is the name of the corporation and in the
center of which is inscribed CORPORATE SEAL; and such seal, as impressed on the
margin hereof, is hereby adopted as the corporate seal of the corporation.
8.3 FISCAL YEAR. The fiscal year of the corporation shall be fixed by the
Board of Directors.
8.4 AMENDMENTS. Except as otherwise provided herein and by law, these
bylaws may be amended or repealed and new bylaws may be adopted by the
affirmative vote of a majority of the directors then holding office at any
regular or special meeting of the Board of Directors.
No bylaw adopted or amended or repealed by the shareholders shall be
readopted, amended or repealed by the Board of Directors, unless the charter or
a bylaw adopted by the shareholders authorizes the Board of Directors to adopt,
amend or repeal that particular bylaw or the bylaws generally.
8.5 INDEMNIFICATION. Any person who at any time serves or has served as a
director or officer of the corporation or in such capacity at the request of
the corporation for any other corporation, partnership, joint venture, trust,
employee benefit plan or other enterprise, shall have a right to be indemnified
by the corporation to the fullest extent permitted by law against (a)
reasonable expenses, including attorneys' fees, actually and necessarily
incurred by him or her in connection with any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative (and any appeal therein), and whether or not brought by or on
behalf of the corporation, seeking to hold him or her liable by reason of the
fact that he or she is or was acting in such capacity, and (b) reasonable
payments made by him or her in satisfaction of any judgment, money decree,
fine, penalty or settlement for which he or she may have become liable in any
such action, suit or proceeding.
The Board of Directors of the corporation shall take all such action as
may be necessary and appropriate to authorize the corporation to pay the
indemnification required by this bylaw, including without limitation, to the
extent needed, making a good faith evaluation of the manner in which the
claimant for indemnity acted and of the reasonable amount of indemnity due him
or her and giving notice to, and obtaining approval by, the shareholders of the
corporation.
Any person who at any time after the adoption of this bylaw serves or has
served in any of the aforesaid capacities for or on behalf of the corporation
shall be deemed to be doing or to have done so in reliance upon, and as
consideration for, the right of indemnification provided herein. Such right
shall inure to the benefit of the legal representatives of any such person and
shall not be exclusive of any other rights to which such person may be entitled
apart from the provision of this bylaw.
The rights granted herein shall not be limited by the provisions contained
in Sections 55-8-51 through 55-8-56 of the North Carolina Business Corporation
Act or any successor to such statutes.
8.6 ADVANCE PAYMENT OF EXPENSES. The corporation shall (upon receipt of an
undertaking by or on behalf of the director or officer involved to repay the
expenses described herein unless it ultimately shall be determined that he or
she is entitled to be indemnified by the corporation against such expenses) pay
expenses (including attorneys' fees) incurred in defending any threatened,
pending or completed action, suit or proceeding and any appeal therein, whether
civil, criminal,
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administrative, investigative or arbitrative, whether formal or informal, or
whether the director or officer appearing as a witness at a time when he or she
has not been named as a defendant or a respondent with respect thereto, in
advance of the final disposition of such proceeding.
8.7 DIRECTORS AND OFFICERS LIABILITY INSURANCE. The Board of Directors may
cause the corporation to purchase and maintain Directors' and Officers'
liability insurance for the benefit of any person who is or was serving as a
director or officer of this corporation or for the benefit of any person who is
or was serving at the request of this corporation as a director or officer of
another corporation, partnership, joint venture, trust, employee benefit plan
or other enterprise. This insurance may cover any liability incurred by such
person in any capacity arising out of this status as such even if the
corporation would not otherwise have the power to indemnify him or her against
that liability.
8.8 EFFECTIVE DATE OF NOTICE. Except as provided in Section 5 of Article
II, written notice shall be effective at the earliest of the following: (1)
when received; (2) five days after its deposit in the United States mail, as
evidenced by the postmark, if mailed with postage thereon prepaid and correctly
addressed; or (3) on the date shown on the return receipt, if sent by
registered or certified mail, return receipt requested, if the receipt is
signed by or on behalf of the addressee.
8.9 CORPORATE RECORDS. Any records maintained by the corporation in the
regular course of its business, including its stock ledger, books of account
and minute books, shall be kept in written form or any other information
storage method; provided that the records so kept can be converted into written
form within a reasonable time. The corporation shall so convert any records so
kept upon the request of any person entitled to inspect the same. The
corporation shall maintain at its principal office the following records: (1)
Articles of Incorporation or Restated Articles of Incorporation and all
amendments thereto; (2) bylaws or restated bylaws and all amendments thereto;
(3) resolutions by the Board of Directors creating classes or series of shares
and affixing rights, preferences or limitations to shares; (4) minutes of all
shareholder meetings or action taken without a meeting for the past three
years; (5) all written communications to shareholders for the past three years,
including financial statements; (6) a list of the names and business addresses
of its current directors and officers; and (7) the corporation's most recent
annual report filed with the North Carolina Secretary of State.
8.10 AMENDMENTS TO ARTICLES OF INCORPORATION. To the extent permitted by
law, the Board of Directors may amend the Articles of Incorporation without
shareholder approval to (1) delete the initial directors' names and addresses;
(2) change the initial registered agent or office in any state in which it is
qualified to do business, provided such change is on file with the respective
Secretary of State; (3) change each issued and unissued share of an outstanding
class into a greater number of whole shares, provided that class is the
corporation's only outstanding share class; (4) change the corporate name by
substituting "corporation," "incorporated," "company," "limited" or the
abbreviations therefor for a similar word or abbreviation or by adding,
deleting or changing a geographic designation in the name; (5) make any other
change expressly permitted by the North Carolina Business Corporation Act to be
made without shareholder action. All other amendments to the Articles of
Incorporation must be approved by the appropriate voting group or groups as
required by law.
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APPENDIX D
DISSENTERS' RIGHTS
N.C. GEN. STAT. CHAPTER 55, ARTICLE 13 WITH 1997 AMENDMENTS
GENERAL STATUTES OF NORTH CAROLINA
CHAPTER 55. NORTH CAROLINA BUSINESS CORPORATION ACT
ARTICLE 13. DISSENTERS' RIGHTS
PART 1. RIGHT TO DISSENT AND OBTAIN PAYMENT FOR SHARES
N.C. GEN. STAT. ss.55-13-01 (1996)
ss.55-13-01. DEFINITIONS
In this Article:
(1) "Corporation" means the issuer of the shares held by a dissenter
before the corporate action, or the surviving or acquiring corporation by
merger or share exchange of that issuer.
(2) "Dissenter" means a shareholder who is entitled to dissent from
corporate action under G.S. 55-13-02 and who exercises that right when and in
the manner required by G.S. 55-13-20 through 55-13-28.
(3) "Fair value", with respect to a dissenter's shares, means the value of
the shares immediately before the effectuation of the corporate action to which
the dissenter objects excluding any appreciation or depreciation in
anticipation of the corporate action unless exclusion would be inequitable.
(4) "Interest" means interest from the effective date of the corporate
action until the date of payment, at a rate that is fair and equitable under
all the circumstances, giving due consideration to the rate currently paid by
the corporation on its principal bank loans, if any, but not less than the rate
provided in G.S. 24-1.
(5) "Record shareholder" means the person in whose name shares are
registered in the records of a corporation or the beneficial owner of shares to
the extent of the rights granted by a nominee certificate on file with a
corporation.
(6) "Beneficial shareholder" means the person who is a beneficial owner of
shares held in a voting trust or by a nominee as the record shareholder.
(7) "Shareholder" means the record shareholder or the beneficial
shareholder.
N.C. GEN. STAT. ss.55-13-02 (1996)
ss.55-13-02. RIGHT TO DISSENT
(a) In addition to any rights granted under Article 9, a shareholder is
entitled to dissent from, and obtain payment of the fair value of his shares in
the event of, any of the following corporate actions:
(1) Consummation of a plan of merger to which the corporation (other than
a parent corporation in a merger under G.S. 55-11-04) is a party unless (i)
approval by the shareholders of that corporation is not required under G.S.
55-11-03(g) or (ii) such shares are then redeemable by the corporation at a
price not greater than the cash to be received in exchange for such shares;
(2) Consummation of a plan of share exchange to which the corporation is
a party as the corporation whose shares will be acquired, unless such
shares are then redeemable by the corporation at a price not greater than
the cash to be received in exchange for such shares;
(3) Consummation of a sale or exchange of all, or substantially all, of
the property of the corporation other than as permitted G.S. 55-12-01,
including a sale in dissolution, but not including a sale pursuant to court
order or a sale pursuant to a plan by which all or substantially all of the
net proceeds of the sale will be distributed in cash to the shareholders
within one year after the date of sale;
(4) An amendment of the articles of incorporation that materially and
adversely affects rights in respect of a dissenter's shares because it (i)
alters or abolishes a preferential right of the shares; (ii) creates,
alters, or abolishes a right in respect of redemption, including a
provision respecting a sinking fund for the redemption or repurchase, of
the shares; (iii) alters or abolishes a preemptive right of the holder of
the shares to acquire shares or other securities; (iv) excludes
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or limits the right of the shares to vote on any matter, or to cumulate
votes; (v) reduces the number of shares owned by the shareholder to a
fraction of a share if the fractional share so created is to be acquired
for cash under G.S. 55-6-04; or (vi) changes the corporation into a
nonprofit corporation or cooperative organization;
(5) Any corporate action taken pursuant to a shareholder vote to the
extent the articles of incorporation, bylaws, or a resolution of the board
of directors provides that voting or nonvoting shareholders are entitled to
dissent and obtain payment for their shares.
(b) A shareholder entitled to dissent and obtain payment for his shares
under this Article may not challenge the corporate action creating his
entitlement, including without limitation a merger solely or partly in exchange
for cash or other property, unless the action is unlawful or fraudulent with
respect to the shareholder or the corporation.
(c) Notwithstanding any other provision of this Article, there shall be no
right of dissent in favor of holders of shares of any class or series which, at
the record date fixed to determine the shareholders entitled to receive notice
of and to vote at the meeting at which the plan of merger or share exchange or
the sale or exchange of property is to be acted on, were (i) listed on a
national securities exchange or (ii) held by at least 2,000 record
shareholders, unless in either case:
(1) The articles of incorporation of the corporation issuing the shares
provide otherwise;
(2) In the case of a plan of merger or share exchange, the holders of the
class or series are required under the plan of merger or share exchange to
accept for the shares anything except:
a. Cash;
b. Shares, or shares and cash in lieu of fractional shares of the
surviving or acquiring corporation, or of any other corporation which, at
the record date fixed to determine the shareholders entitled to receive
notice of and vote at the meeting at which the plan of merger or share
exchange is to be acted on, were either listed subject to notice of
issuance on a national securities exchange or held of record by at least
2,000 record shareholders; or
c. A combination of cash and shares as set forth in sub-subdivisions
a. and b. of this subdivision.
N.C. GEN. STAT. ss.55-13-03 (1996)
ss.55-13-03. DISSENT BY NOMINEES AND BENEFICIAL OWNERS
(a) A record shareholder may assert dissenters' rights as to fewer than
all the shares registered in his name only if he dissents with respect to all
shares beneficially owned by any one person and notifies the corporation in
writing of the name and address of each person on whose behalf he asserts
dissenters' rights. The rights of a partial dissenter under this subsection are
determined as if the shares as to which he dissents and his other shares were
registered in the names of different shareholders.
(b) A beneficial shareholder may assert dissenters' rights as to shares
held on his behalf only if:
(1) He submits to the corporation the record shareholder's written
consent to the dissent not later than the time the beneficial shareholder
asserts dissenters' rights; and
(2) He does so with respect to all shares of which he is the beneficial
shareholder.
N.C. GEN. STAT. ss.55-13-04 (1996)
ss.ss.55-13-04 THROUGH 55-13-19
Reserved for future codification purposes.
PART 2. PROCEDURE FOR EXERCISE OF DISSENTERS' RIGHTS
N.C. GEN. STAT. ss.55-13-20 (1996)
ss.55-13-20. NOTICE OF DISSENTERS' RIGHTS
(a) If proposed corporate action creating dissenters' rights under G.S.
55-13-02 is submitted to a vote at a shareholders' meeting, the meeting notice
must state that shareholders are or may be entitled to assert dissenters'
rights under this Article and be accompanied by a copy of this Article.
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(b) If corporate action creating dissenters' rights under G.S. 55-13-02 is
taken without a vote of shareholders, the corporation shall no longer than 10
days thereafter notify in writing all shareholders entitled to assert
dissenters' rights that the action was taken and send them the dissenters'
notice described in G.S. 55-13-22.
(c) If a corporation fails to comply with the requirements of this
section, such failure shall not invalidate any corporate action taken; but any
shareholder may recover from the corporation any damage which he suffered from
such failure in a civil action brought in his own name within three years after
the taking of the corporate action creating dissenters' rights under G.S.
55-13-02 unless he voted for such corporate action.
ss.55-13-21. NOTICE OF INTENT TO DEMAND PAYMENT
(a) If proposed corporate action creating dissenters' rights under G.S.
55-13-02 is submitted to a vote at a shareholders' meeting, a shareholder who
wishes to assert dissenters' rights:
(1) Must give to the corporation, and the corporation must actually
receive, before the vote is taken written notice of his intent to demand
payment for his shares if the proposed action is effectuated; and
(2) Must not vote his shares in favor of the proposed action.
(b) A shareholder who does not satisfy the requirements of subsection (a)
is not entitled to payment for his shares under this Article.
N.C. GEN. STAT. ss.55-13-22 (1996)
ss.55-13-22. DISSENTERS' NOTICE
(a) If proposed corporate action creating dissenters' rights under G.S.
55-13-02 is authorized at a shareholders' meeting, the corporation shall mail
by registered or certified mail, return receipt requested, a written
dissenters' notice to all shareholders who satisfied the requirements of G.S.
55-13-21.
(b) The dissenters' notice must be sent no later than 10 days after
shareholder approval, or if no shareholder approval is required, after the
approval of the board of directors, of the corporate action creating
dissenters' rights under G.S. 55-13-02, and must:
(1) State where the payment demand must be sent and where and when
certificates for certificated shares must be deposited;
(2) Inform holders of uncertificated shares to what extent transfer of
the shares will be restricted after the payment demand is received;
(3) Supply a form for demanding payment;
(4) Set a date by which the corporation must receive the payment demand,
which date may not be fewer than 30 nor more than 60 days after the date
the subsection (a) notice is mailed; and
(5) Be accompanied by a copy of this Article (last amended by S.L.
97-485, L. '97, eff. 10-1-97.).
N.C. GEN. STAT. ss.55-13-23 (1996)
ss.55-13-23. DUTY TO DEMAND PAYMENT
(a) A shareholder sent a dissenters' notice described in G.S. 55-13-22
must demand payment and deposit his share certificates in accordance with the
terms of the notice.
(b) The shareholder who demands payment and deposits his share
certificates under subsection (a) retains all other rights of a shareholder
until these rights are cancelled or modified by the taking of the proposed
corporate action.
(c) A shareholder who does not demand payment or deposit his share
certificates where required, each by the date set in the dissenters' notice, is
not entitled to payment for his shares under this Article.
N.C. GEN. STAT. ss.55-13-24 (1996)
ss.55-13-24. SHARE RESTRICTIONS
(a) The corporation may restrict the transfer of uncertificated shares
from the date the demand for their payment is received until the proposed
corporate action is taken or the restrictions released under G.S. 55-13-26.
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(b) The person for whom dissenters' rights are asserted as to
uncertificated shares retains all other rights of a shareholder until these
rights are cancelled or modified by the taking of the proposed corporate
action.
N.C. GEN. STAT. ss.55-13-25 (1996)
ss.55-13-25. PAYMENT
(a) As soon as the proposed corporate action is taken, or within 30 days
after receipt of a payment demand, the corporation shall pay each dissenter who
complied with G.S. 55-13-23 the amount the corporation estimates to be the fair
value of his shares, plus interest accrued to the date of payment.
(b) The payment shall be accompanied by:
(1) The corporation's most recent available balance sheet as of the end
of a fiscal year ending not more than 16 months before the date of payment,
an income statement for that year, a statement of cash flows for that year,
and the latest available interim financial statements, if any:
(2) An explanation of how the corporation estimated the fair value of the
shares;
(3) An explanation of how the interest was calculated;
(4) A statement of the dissenters' right to demand payment under G.S.
55-13-28; and
(5) A copy of this Article.
N.C. GEN. STAT. ss.55-13-26 (1996)
ss.55-13-26. FAILURE TO TAKE ACTION
(a) If the corporation does not take the proposed action within 60 days
after the date for demanding payment and depositing share certificates, the
corporation shall return the deposited certificates and release the transfer
restrictions imposed on uncertificated shares.
(b) If after returning deposited certificates and releasing transfer
restrictions, the corporation takes the proposed action, it must send a new
dissenters' notice under G.S. 55-13-22 and repeat the payment demand procedure.
N.C. GEN. STAT. 155-13-27 (1996)
ss.55-13-27. RESERVED FOR FUTURE CODIFICATION PURPOSES.
N.C. GEN. STAT. ss.55-13-28 (1996)
ss.55-13-28. PROCEDURE IF SHAREHOLDER DISSATISFIED WITH CORPORATION'S
PAYMENT OR FAILURE TO PERFORM
(a) A dissenter may notify the corporation in writing of his own estimate
of the fair value of his shares and amount of interest due, and demand payment
of the amount in excess of the payment by the corporation under G.S. 55-13-25
for the fair value of his shares and interest due, if:
(1) The dissenter believes that the amount paid under G.S. 55-13-25 is
less than the fair value of his shares or that the interest due is
incorrectly calculated;
(2) The corporation fails to make payment under G.S. 55-13-25; or
(3) The corporation, having failed to take the proposed action, does not
return the deposited certificates or release the transfer restrictions
imposed on uncertificated shares within 60 days after the date set for
demanding payment.
(b) A dissenter waives his right to demand payment under this section
unless he notifies the corporation of his demand in writing (i) under
subdivision (a)(l) within 30 days after the corporation made payment for his
shares or (ii) under subdivisions (a)(2) and (a)(3) within 30 days after the
corporation has failed to perform timely. A dissenter who fails to notify the
corporation of his demand under subsection (a) within such 30-day period shall
be deemed to have withdrawn his dissent and demand for payment.
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N.C. GEN. STAT. ss.55-13-29 (1996)
ss.55-13-29. RESERVED FOR FUTURE CODIFICATION PURPOSES.
PART 3. JUDICIAL APPRAISAL OF SHARES
N.C. GEN. STAT. ss.55-13-30 (1996)
ss.55-13-30. COURT ACTION
(a) If a demand for payment under G.S. 55-13-28 remains unsettled, the
dissenter may commence a proceeding within 60 days after the earlier of (i) the
date payment is made under G.S. 55-13-25, or (ii) the date of the dissenter's
payment demand under G.S. 55-13-28 by filing a complaint with the Superior
Court Division of the General Court of Justice to determine the fair value of
the shares and accrued interest. A dissenter who takes no action within the
60-day period shall be deemed to have withdrawn his dissent and demand for
payment.
(a1) Repealed by Session Laws 1997-202, s.4, effective October 1, 1997.
(b) [Reserved for future codification purposes.]
(c) The court shall have the discretion to make all dissenters (whether or
not residents of this State) whose demands remain unsettled parties to the
proceeding as in an action against their shares and all parties must be served
with a copy of the complaint. Nonresidents may be served by registered or
certified mail or by publication as provided by law.
(d) The jurisdiction of the court in which the proceeding is commenced
under subsection (a) is plenary and exclusive. The court may appoint one or
more persons as appraisers to receive evidence and recommend decision on the
question of fair value. The appraisers have the powers described in the order
appointing them, or in any amendment to it. The parties are entitled to the
same discovery rights as parties in other civil proceedings. The proceeding
shall be tried as in other civil actions. However, in a proceeding by a
dissenter in a corporation that was a public corporation immediately prior to
consummation of the corporate action giving rise to the right of dissent under
G.S. 55-13-02, there is no right to a trial by jury.
(e) Each dissenter made a party to the proceeding is entitled to judgment
for the amount, if any, by which the court finds the fair value of his shares,
plus interest, exceeds the amount paid by the corporation.
ss.55-13-30. COURT ACTION
(a) The court in an appraisal proceeding commenced under G.S. 55-13-30
shall determine all costs of the proceeding, including the reasonable
compensation and expenses of appraisers appointed by the court, and shall
assess the costs as it finds equitable.
(b) The court may also assess the fees and expenses of counsel and experts
for the respective parties, in amounts the court finds equitable.
(1) Against the corporation and in favor of any or all dissenters if the
court finds the corporation did not substantially comply with the
requirements of G.S. 55-13-20 through 55-13-28; or
(2) Against either the corporation or a dissenter, in favor of either or
any other party, if the court finds that the party against whom the fees
and expenses are assessed acted arbitrarily, vexatiously, or not in good
faith with respect to the rights provided by this Article.
(c) If the court finds that the services of counsel for any dissenter were
of substantial benefit to other dissenters similarly situated, and that the
fees for those services should not be assessed against the corporation, the
court may award to these counsel reasonable fees to be paid out of the amounts
awarded the dissenters who were benefited.
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CARDIOVASCULAR DIAGNOSTICS, INC.
5301 DEPARTURE DRIVE
RALEIGH, NORTH CAROLINA 27616
PROXY FOR SPECIAL MEETING OF SHAREHOLDERS
December 1, 1998
The undersigned hereby appoints John P. Funkhouser and Paul T. Storey, and
each of them, as proxies, each with full power of substitution, and hereby
authorizes them to represent and to vote, as designated below, all the shares
of Common Stock of Cardiovascular Diagnostics, Inc., a North Carolina
corporation (the "Company"), held of record by the undersigned on October 12,
1998, at the Special Meeting of Shareholders to be held at the Company's
principal executive office at 5301 Departure Drive, Raleigh, North Carolina at
10:00 a.m. on December 1, 1998, or at any adjournment(s) thereof. The following
proposals to be brought before the meeting are more specifically described in
the accompanying Proxy Statement.
(1) To consider and act upon an Agreement and Plan of Merger providing for
the merger of the Company with a wholly owned subsidiary of PharmaNetics, Inc.,
a North Carolina corporation organized prior to the merger for the purpose of
becoming a holding company for the Company (the "Holding Company"), pursuant to
which all of the Company's shareholders will become shareholders of Holding
Company on a share-for-share basis and the Company will become a wholly owned
subsidiary of Holding Company;
VOTE FOR [ ] VOTE AGAINST [ ] ABSTAIN [ ]
(2) To approve an amendment to the Company's 1995 Stock Plan increasing
the number of shares of Common Stock reserved for issuance thereunder by
350,000 shares:
VOTE FOR [ ] VOTE AGAINST [ ] ABSTAIN [ ]
(3) In their discretion, the proxies are authorized to vote upon such other
matters as may properly come before the meeting.
GRANT AUTHORITY [ ] WITHHOLD AUTHORITY [ ]
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF THE COMPANY.
(OVER)
<PAGE>
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED
HEREIN BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL
BE VOTED FOR APPROVAL OF PROPOSALS 1 AND 2, AND IN THE DISCRETION OF THE
PROXIES WITH RESPECT TO ANY OTHER MATTERS PROPERLY BROUGHT BEFORE THE
SHAREHOLDERS AT THE MEETING.
--------------------------------------
Signature
--------------------------------------
Signature, if held Jointly
PLEASE DATE AND SIGN EXACTLY AS NAME
APPEARS ON YOUR STOCK CERTIFICATE.
JOINT OWNERS SHOULD EACH SIGN
PERSONALLY. TRUSTEES, CUSTODIANS,
EXECUTORS AND OTHERS SIGNING IN A
REPRESENTATIVE CAPACITY SHOULD
INDICATE THE CAPACITY IN WHICH THEY
SIGN.
Date: -------------- , 1998
PLEASE MARK, SIGN, DATE AND RETURN
THIS PROXY CARD PROMPTLY USING THE
ENCLOSED ENVELOPE, WHETHER OR NOT YOU
PLAN TO BE PRESENT AT THE MEETING. IF
YOU ATTEND THE MEETING, YOU CAN VOTE
EITHER IN PERSON OR BY YOUR PROXY.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Registrant's Articles of Incorporation and Bylaws include provisions
to (i) eliminate the personal liability of its directors for monetary damages
resulting from beaches of their fiduciary duty to the fullest extent permitted
by Section 55-8-30(e) of the North Carolina Business Corporation Act (the
"North Carolina Law"), and (ii) require the Registrant to indemnify its
directors and officers to the fullest extent permitted by Sections 55-8-50
through 55-8-58 of the North Carolina Law, including circumstances in which
indemnification is otherwise discretionary. Pursuant to Sections 55-8-51 and
55-8-57 of the North Carolina Law, a corporation generally has the power to
indemnify its present and former directors, officers, employee and agents
against expenses incurred by them in connection with any suit to which they
are, or are threatened to be made, a party by reason of their serving in such
positions so long as they acted in good faith and in a manner they reasonably
believed to be in, or not opposed to, the best interest of the corporation, and
with respect to any criminal action, they had no reasonable cause to believe
their conduct was unlawful. The Registrant believes that these provisions are
necessary to attract and retain qualified persons as directors and officers.
These provisions do not eliminate the directors' duty of care, and, in
appropriate circumstances, equitable remedies such as injunctive or other forms
of non-monetary relief will remain available under North Carolina Law. In
addition, each director will continue to be subject to liability for breach of
the director's duty of loyalty to the Registrant, for acts or omissions not in
good faith or involving intentional misconduct or knowing violations of law,
for acts or omissions that the director believes to be contrary to the best
interest of the Registrant or its shareholders, for any transaction from which
the director derived an improperly personal benefit, for acts or omissions
involving a reckless disregard for the director's duty to the Registrant or its
shareholders when the director was aware or should have been aware of a risk of
serious injury to the Registrant or its shareholders, for acts or omissions
that constitute an unexcused pattern of inattention that amounts to an
abdication of the director's duty to the Registrant or its shareholders, for
improper transactions between the director and the Registrant and for improper
distributions to shareholders and loans to directors and officers. These
provisions do not affect a director's responsibilities under any other laws,
such as the federal securities laws or state or federal environmental laws.
The Registrant's Bylaws require the Registrant to indemnify its directors
and officers against expenses, judgments, fines, settlements and other amounts
actually and reasonably incurred (including expenses of a derivative action) in
connection with any proceeding, whether actual or threatened, to which any such
person may be made a party by reason of the fact that such person is or was a
director or officer of the Registrant or any of its affiliated enterprises,
provided such person acted in good faith and in a manner such person reasonably
believed to be in or not opposed to the best interest of the Registrant and,
with respect to any criminal proceeding, had no reasonable cause to believe his
or her conduct was unlawful.
CVDI maintains liability insurance insuring CVDI's officers and directors
against liabilities that they may incur in such capacities. The Registrant
expects to assume such policies and have them cover its officers and directors
following the
reorganization.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers or persons controlling the Registrant pursuant
to the foregoing provisions, the Registrant has been informed that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is therefore unenforceable.
At present, there is no pending litigation or proceeding involving a
director or officer of the Registrant as to which indemnification is being
sought nor is the Registrant aware of any threatened litigation that may result
in claims for indemnification by any officer or director.
II-1
<PAGE>
ITEM 21. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- --------------- ----------------------------------------------------------------------------------------------------
<S> <C>
2.1 Agreement and Plan of Merger, dated as of July 31, 1998, among the Registrant, Cardiovascular
Diagnostics, Inc. and CVDI Merger Corporation (see page A-1).
3.1 (a) Articles of Incorporation, as currently in effect.
3.3 (a) Bylaws.
4.1 (a) Form of Common Stock certificate.
5.1 Opinion of Wyrick Robbins Yates & Ponton LLP.
8.1 Tax Opinion of Wyrick Robbins Yates & Ponton LLP.
10.1 (a)* License Agreement with Boehringer Mannheim Corporation, dated June 21, 1989, as amended
September 28, 1995.
10.2 (a)* License Agreement with Tokuyama Soda Company, Ltd., dated October 6, 1988.
10.3 (a) Form of International Distributor Agreement.
10.4 (a)* Purchasing Agreement with VHA Inc., dated April 1, 1995.
10.5 (a) Lease Agreement dated November 21, 1990 relating to 5301 Departure Drive, Raleigh, as amended.
10.6 (a) Contract of Lease for Industrial Property, Service Agreement and Addendum, dated effective as of
January 1, 1995 (The Netherlands).
10.7 (a) Amended and Restated Registration Rights Agreement, dated December 16, 1994, as amended
August 31, 1995.
10.8 (a) 1994 Stock Plan, as amended.
10.9 (a) 1995 Stock Plan, as amended.
10.10 (a)* License Agreement with Duke University, dated January 22, 1993.
10.11 (a)* Agreement between Coeur and E-Z-EM, Inc., dated March 24, 1995.
10.12 (a) Financial Assistance Agreement with North Carolina Biotechnology Center, dated January 7, 1994.
10.13 (a) Equipment Lease Agreements with Centura Bank, dated March 15, 1993.
10.14 (a) Equipment Finance Line with Phoenix Growth Capital Corp., dated May 5, 1995.
10.15 (a) Master Equipment Lease Agreement with Venture Lending & Leasing, Inc., dated June 2, 1995.
10.16 (a) Loan Agreements with Max Edward Bolene, d/b/a Carolina Financial Services, Inc., as amended.
10.17 (a) Security Agreement and Commercial Notes between Coeur and Centura Bank, dated September 21,
1995.
10.18 (b)* Amendment Agreement, dated December 14, 1995, to License Agreement with Tokuyama Soda
Company, Ltd.
10.19 (c)* Distribution Agreement, dated October 18, 1996, with Dade International.
10.20 (d)* Patent Sublicense Agreement, dated December 1, 1996, with Knoll AG.
10.21 (d) Development Agreement, dated August 21, 1996, with Bayer Corporation.
10.22* Distribution Agreement with Chiron Diagnostics Corporation dated August 28, 1998.
10.23 Common Stock Purchase Agreement with Chiron Diagnostics Corporation dated August 28, 1998.
21.1 (a) List of Subsidiaries.
23.1 Consent of PricewaterhouseCoopers LLP
23.2 Consent of Wyrick Robbins Yates & Ponton LLP (contained in Exhibit 5.1).
24.1 Power of Attorney (see page S-1).
</TABLE>
- ---------
* Confidential treatment requested.
(a) Incorporated herein by reference to the identically-numbered exhibits to
the Registrant's Registration Statement on Form S-1 (Registration No.
33-98078) initially filed October 12, 1995, as amended.
(b) Incorporated herein by reference to the identically-numbered exhibit to the
Registrant's Annual Report on Form 10-K for the year ended December 31,
1995.
(c) Incorporated herein by reference to the identically-numbered exhibit to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended September
30, 1996.
(d) Incorporated herein by reference to the identically-numbered exhibit to the
Registrant's Annual Report on Form 10-K for the year ended December 31,
1996.
II-2
<PAGE>
ITEM 22. UNDERTAKINGS
The undersigned registrant hereby undertakes as follows: that prior to any
public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c) the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other Items of the applicable form.
The registrant undertakes that every prospectus (i) that is filed pursuant
to the foregoing paragraph immediately preceding, or (ii) that purports to meet
the requirements of section 10(a)(3) of the Securities Act and is used in
connection with an offering of securities subject to Rule 415, will be filed as
a part of an amendment to the registration statement and will not be used until
such amendment is effective, and that, for purposes of determining any
liability under the Securities Act, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof. Insofar as indemnification for
liabilities arising under the Securities Act may be permitted for directors,
officers, and controlling persons of the Registrant pursuant to provisions
described in Item 20 above, or otherwise, the Registrant has been advised that
in the opinion of the SEC such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer,
or controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer, or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue. The undersigned registrant hereby undertakes to respond to
requests for information that is incorporated by reference into the prospectus
pursuant to Items 4, 10(b), 11 or 13 of this Form, within one business day of
receipt of such request, and to send the incorporated documents by first class
mail or other equally prompt means. This includes information contained in
documents filed subsequent to the effective date of the registration statement
through the date of responding to the request.
The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and
Intercardia being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the Raleigh, State of North
Carolina, on this 20th day of October 1998.
PHARMANETICS, INC.
By: /s/ JOHN P. FUNKHOUSER
-------------------------------------
JOHN P. FUNKHOUSER
PRESIDENT AND CHIEF EXECUTIVE OFFICER
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints John P.
Funkhouser and Paul T. Storey, and each of them, his true and lawful
attorney-in-fact and agent, with full powers of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments (including post-effective
amendments) to this Registration Statement and any related Registration
Statements filed pursuant to Rule 462(b) promulgated under the Securities Act
of 1933, and to file the same, with all exhibits thereto, and other documents
in connection therewith, with the Securities and Exchange Commission, granting
unto said attorney-in-fact and agent, full power and authority to do and
perform each and every act and thing requisite and necessary to be done in and
about the premises, as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that said attorney-in-fact
and agent, or his substitute or substitutes, may lawfully do or cause to be
done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
- ------------------------------------- ------------------------------------ -----------------
<S> <C> <C>
/s/ JOHN P. FUNKHOUSER Sole Director, President and Chief October 22, 1998
---------------------------------- Executive Officer (Principal
JOHN P. FUNKHOUSER Executive Officer)
/s/ PAUL T. STOREY Director of Finance, Secretary and October 22, 1998
---------------------------------- Treasurer (Principal Financial and
PAUL T. STOREY Accounting Officer)
</TABLE>
II-4
Exhibit 5.1
[LETTERHEAD OF WYRICK ROBBINS YATES & PONTON LLP]
October 22, 1998
PharmaNetics, Inc.
5301 Departure Drive
Raleigh, North Carolina 27616
Re: Registration Statement on Form S-4
Ladies and Gentlemen:
We have examined the Registration Statement on Form S-4 (the "Registration
Statement"), filed on or about the date hereof by PharmaNetics, Inc., a North
Carolina corporation (the "Company"), with the Securities and Exchange
Commission in connection with the registration under the Securities Act of 1933,
as amended, of 7,436,724 shares of PharmaNetics' Common Stock, $.001 par value
per share (the "Shares"). The Shares are to be issued to the shareholders of
Cardiovascular Diagnostics, Inc. in exchange for their shares on a one-for-one
basis as described in the Registration Statement and pursuant to the Agreement
and Plan of Merger filed as an exhibit thereto. In our examination, we have
assumed the genuineness of all signatures, the authenticity of all documents
submitted to us as originals and the conformity with the original of all
documents submitted to us as copies thereof.
As your counsel, we have examined the proceedings taken, and are familiar
with the proceedings proposed to be taken, in connection with the issuance of
the Shares.
It is our opinion that, upon completion of the proceedings being taken or
contemplated by us, as such counsel, to be taken prior to the issuance of the
Shares, including the proceedings being taken in order to permit such
transaction to be carried out in accordance with applicable state securities
laws, the Shares when issued in the manner referred to in the Registration
Statement and in accordance with the resolutions adopted by the Boards of
Directors of CVDI and the Company, will be legally and validly issued, fully
paid and nonassessable.
We consent to the use of this opinion as an exhibit to the Registration
Statement and further consent to the use of our name wherever appearing in the
Registration Statement, including the Prospectus constituting a part thereof,
and any amendments thereto.
Very truly yours,
/s/ WYRICK ROBBINS YATES & PONTON LLP
Exhibit 8.1
[LETTERHEAD OF WYRICK ROBBINS YATES & PONTON LLP]
October 22, 1998
Cardiovascular Diagnostics, Inc.
5301 Departure Drive
Raleigh, North Carolina 27616
Ladies and Gentlemen:
We have acted as counsel to Cardiovascular Diagnostics, Inc., a North
Carolina corporation ("CVDI" or the "Company"), and have been asked to render
this opinion, in connection with the merger (the "Merger"), pursuant to that
certain Agreement and Plan of Merger dated as of July 31, 1998 (the "Merger
Agreement"), of a wholly owned subsidiary ("Merger Sub") of Pharmanetics, Inc.,
a North Carolina corporation organized as a wholly owned subsidiary of the
Company prior to the Merger for the purpose of becoming a holding company for
the Company ("Holding Company"), into the Company. Pursuant to the Merger all of
the Company's shareholders, other than those perfecting dissenters' rights under
North Carolina law (the "Exchanging Shareholders"), will become shareholders of
Holding Company on a share-for-share basis, and the Company will become a wholly
owned subsidiary of Holding Company (the "Reorganization").
As such counsel, we have examined those documents and certificates,
including representations of the Company, that we have deemed necessary as a
basis for the opinion hereinafter expressed.
In rendering our opinion, we have considered the applicable provisions of
the Internal Revenue Code of 1986, as amended to the date hereof (the "Code"),
existing final and temporary Treasury Regulations promulgated thereunder, and
the existing pertinent judicial authorities and interpretative rulings of the
Internal Revenue Service ("IRS")or the Department of Treasury regarding federal
income tax laws (collectively, the "Tax Laws"), all of which are subject to
change. The following opinion is not binding on the IRS, and there can be no
assurance that the IRS will take a similar view with respect to the tax
consequences described below. No ruling from the IRS has been or will be
requested or obtained on any tax matters relating to the Reorganization.
<PAGE>
Cardiovascular Diagnostics, Inc.
October 22, 1998
Page 2
This opinion covers the material United States federal income tax
consequences of the Reorganization to the holders of CVDI Common Stock, Holding
Company and the Company. This opinion does not deal with all aspects or details
of federal taxation that may be relevant to the Company or its shareholders.
Based upon the foregoing and subject to (a) the completion of the
proceedings being taken or contemplated to be taken pursuant to the Merger
Agreement providing for the Merger, and (b) the limitations, qualifications and
assumptions set forth herein, we are of the opinion that:
The Merger as a Tax-Free Reorganization.
1. The Reorganization will, under current law, qualify as a
"reorganization" for federal income tax purposes within the meaning of Section
368(a) of the Internal Revenue Code of 1986, as amended (the "Code"), pursuant
to Sections 368(a)(1)(A) and 368(a)(2)(E) of the Code.
2. CVDI, Holding Company and Merger Sub each will be "a party to a
reorganization" (within the meaning of Section 368(b) of the Code) with respect
to the Reorganization, and no gain or loss will be recognized by CVDI, Holding
Company or Merger Sub as a result of the Merger, pursuant to Sections 361 and
357(a) of the Code.
3. The following tax consequences will generally result to the Exchanging
Shareholders:
a. No gain or loss will be recognized by Exchanging Shareholders as
a result of their exchange of shares of CVDI Common Stock solely for Holding
Company Common Stock ("Reorganization Shares") in the Reorganization;
b. An Exchanging Shareholder's income tax basis in the
Reorganization Shares received in the Reorganization will be the same as the
basis such shareholder had in the CVDI Common Stock surrendered in exchange
therefor; and
c. The holding period for the Reorganization Shares received by each
Exchanging Shareholder will include the holding period of the shares of CVDI
Common Stock surrendered in exchange therefor, provided that the shares of CVDI
Common Stock are held as a capital asset by such holder at the effective time of
the Merger.
4. A shareholder that perfects dissenters' rights under North Carolina law
(a "Dissenting Shareholder") and receives solely cash in exchange for CVDI
Common Stock by exercising dissenter's rights shall be treated as having
received a distribution in redemption of such shareholder's stock subject to the
provisions and limitations of Section 302 of the Code. If, after the Merger of
Merger Sub into CVDI, the Dissenting Shareholder neither directly owns nor is
considered to own, under the constructive ownership rules of Section 318(a) of
the Code, any Holding Company stock, the redemption will result in a capital
gain or loss to such Dissenting
<PAGE>
Cardiovascular Diagnostics, Inc.
October 22, 1998
Page 3
Shareholder, pursuant to Revenue Ruling 74-515, 1974-2 C.B. 118, and Section
302(b) of the Code.
The Merger as a Tax-Free Exchange.
5. Although in form the Reorganization has been structured as a reverse
triangular merger, the Reorganization will also qualify as a tax-free exchange
under Code Section 351 by the Exchanging Shareholders to Holding Company.
6. The following tax consequences will generally result to the Exchanging
Shareholders in an exchange to which Code Section 351applies:
a. No gain or loss will be recognized by Exchanging Shareholders as
a result of their exchange of shares of CVDI Common Stock solely for the
Reorganization Shares in the Merger;
b. An Exchanging Shareholder's income tax basis in the
Reorganization Shares received in the Reorganization will be the same as the
basis such shareholder had in the CVDI Common Stock surrendered in exchange
therefor; and
c. The holding period for the Reorganization Shares received by each
Exchanging Shareholder will include the holding period for the shares of CVDI
Common Stock surrendered in exchange therefor, provided that the shares of CVDI
Common Stock are held as a capital asset by such holder at the effective time of
the Merger.
7. Under Code Section 351, CVDI and Holding Company will not recognize any
gain or loss as a result of the Reorganization.
Taxable Transactions. Notwithstanding our opinion above, which is not
binding on the IRS, a successful challenge by the IRS to the tax-free status of
the Reorganization (both as a reorganization pursuant to Code Section 368 and as
a tax-free exchange pursuant to Code Section 351, as discussed above) would
result in a recharacterization of the transaction by the IRS as a taxable sale
by Exchanging Shareholders of their CVDI Common Stock in exchange for the
Reorganization Shares. In this event, an Exchanging Shareholder would recognize
gain or loss with respect to each share of CVDI Common Stock exchanged in the
Reorganization equal to the difference between the fair market value, at the
effective time of the Merger, of the total consideration received for such share
in the Reorganization (i.e., the Reorganization Shares) and the shareholder's
basis in the CVDI Common Stock so exchanged. An Exchanging Shareholder's
aggregate basis in the Reorganization consideration so received would equal his
or her fair market value at the time of receipt, and the Exchanging
Shareholder's holding period for such stock would begin on the date of the
consummation of the Reorganization.
Irrespective of the possible tax-free nature of the Reorganization, a
recipient of Reorganization Shares would recognize gain to the extent such
shares are considered to be received in exchange for services or property
(rather than solely in exchange for CVDI Common Stock). All or a portion of such
gain may be taxable as ordinary income.
<PAGE>
Cardiovascular Diagnostics, Inc.
October 22, 1998
Page 4
In connection with rendering this opinion we have assumed, with your
consent, that any amounts paid to Dissenting Shareholders, if any, plus
expenses incurred by CVDI in connection with the Merger, will not exceed ten
percent (10%) of the net assets of CVDI before the Merger. We also assume,
with your consent, without any independent investigation or review thereof, the
following:
1. The authenticity of original documents, the conformity to original
documents of all documents submitted to us as copies, and the genuineness of all
signatures.
2. The truth and accuracy, at all relevant times, of all representations,
warranties and statements made by Holding Company, Merger Sub, CVDI and their
managements in connection with the Merger.
3. The shareholders of CVDI do not, and will not on or before the
effective time of the Merger, have an existing plan or intent to dispose of an
amount of Reorganization Shares to be received in the Merger (or dispose of CVDI
capital stock in anticipation of the Merger).
<PAGE>
Cardiovascular Diagnostics, Inc.
October 22, 1998
Page 5
In addition to the assumptions set forth above, this opinion is subject to
the following exceptions, limitations, qualifications and caveats:
1. We are members of the Bar of the State of North Carolina, and we
express no opinion as to the laws of any jurisdictions other than the federal
income tax laws under the Code.
2. This opinion addresses only the classification of the Merger as a
"reorganization" under Section 368(a) of the Code and as an exchange under
Section 351 of the Code, and does not address any other federal, state, local or
foreign tax consequences that may result from the Merger or any transaction
related thereto (including any transaction undertaken in connection with the
Merger). Although we believe that the opinion covers the material federal income
tax consequences of the Merger, it may not address issues that are material to
an individual shareholder based upon his, her or its particular tax situation.
In particular, we express no opinion regarding (i) whether and the extent to
which any CVDI shareholder who has provided or will provide services to CVDI,
Holding Company or Merger Sub will have compensation income under any provision
of the Code; (ii) the effects of such compensation income, including, but not
limited to, the effect upon the basis and holding period of the Reorganization
Shares received by any such shareholder in the Merger; (iii) the potential
application of the "golden parachute" provisions (Sections 280G, 3121(v)(2) and
4999) of the Code, the alternative minimum tax provisions (Sections 55, 56 and
57) or Sections 108, 305, 306, 341, 357, 424, 708 or 1244 of the Code, or the
regulations promulgated under such Code provisions; (iv) other than the fact
that the Reorganization will qualify as a "reorganization" within the meaning of
Code Section 368 and as an exchange under Section 351 of the Code and the
related corporate- and shareholder-level tax consequences of the Merger to
Holding Company, Merger Sub, CVDI or the shareholders of CVDI, the survival
and/or availability, after the Merger, of any of the federal income tax
attributes or elections of CVDI, after application of any provision of the Code,
as well as the regulations promulgated thereunder and judicial interpretations
thereof; (v) the basis of any equity interest in CVDI acquired by Holding
Company in the Merger; (vi) the tax consequences of any transaction (other than
the Merger) in which CVDI stock or a right to acquire CVDI stock was received;
(vii) events subsequent to the Merger; and (viii) the tax consequences of the
Merger as applied to holders of options for CVDI stock or that may be relevant
to CVDI shareholders and/or holders of options for CVDI stock such as dealers in
securities, corporate shareholders subject to the alternative minimum tax,
foreign persons, and holders of shares acquired upon exercise of stock options
or in other compensatory transactions.
3. No opinion is expressed as to any transaction other than the Merger
described in the Merger Agreement or to any transaction whatsoever, including
the Merger, if all the transactions described in the Merger Agreement are not
consummated in accordance with the terms of such Merger Agreement and without
waiver or breach of any material provision thereof or if all the
representations, warranties, statements and assumptions upon which we have
relied are not true and accurate at all relevant times. In the event any one of
the statements, representations, warranties or assumptions upon which we have
relied upon to issue this opinion is incorrect, our opinion might be materially,
adversely affected and may not be relied upon.
<PAGE>
Cardiovascular Diagnostics, Inc.
October 22, 1998
Page 6
4. This opinion only represents our best judgment regarding the
application of federal income tax laws arising under the Code, existing judicial
decisions, administrative regulations and published rulings and procedures. Our
opinion is not binding on the IRS or the courts, and there is no assurance that
the IRS will not successfully assert a contrary position. Furthermore, no
assurance can be given that future legislative, judicial, administrative or
other changes, on either a prospective or retrospective basis, would not
adversely affect the accuracy of the conclusions stated herein. Nevertheless, by
rendering this opinion, we undertake no responsibility to advise you of any new
developments in the application or interpretation of the federal income tax
laws.
5. We express no opinion regarding compliance with the anti-fraud
provisions of applicable laws.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement to be filed in connection with the Reorganization, and to
the reference to us under the headings "Summary--Federal Income Tax Consequences
of the Merger" and "Federal Income Tax Consequences of the Merger" therein. We
further consent to the discussion of this opinion as it appears in the
prospectus under such headings.
Very truly yours,
/s/ WYRICK ROBBINS YATES & PONTON LLP
Exhibit 10.22
DISTRIBUTION AGREEMENT
THIS AGREEMENT, effective as of August 28, 1998, between CARDIOVASCULAR
DIAGNOSTICS, INC., a corporation organized and existing under the laws of North
Carolina, with its principal offices located at 5301 Departure Drive, Raleigh,
North Carolina ("CVDI"), and CHIRON DIAGNOSTICS CORPORATION, a Delaware
corporation with its principal offices at 63 North Street, Medfield,
Massachusetts ("Chiron Diagnostics").
W I T N E S S E T H:
WHEREAS, CVDI, among other things, is engaged in the manufacture of
certain hemostasis diagnostic products;
WHEREAS, Chiron has experience and capability in the marketing and
distribution of such products and desires to distribute CVDI's hemostasis
products by itself and through its Affiliates and distributors (hereinafter
Chiron Diagnostics, its Affiliates and distributors shall collectively be
referred to as "Chiron"); and
WHEREAS, simultaneously herewith, Chiron will invest $6,000,000 in CVDI
through its purchase of shares of Common Stock of CVDI.
NOW, THEREFORE, the parties agree as follows:
1. DEFINITIONS.
The following capitalized terms shall have the meanings set forth below:
- ------------------
[ ] CONFIDENTIAL TREATMENT REQUESTED; CERTAIN INFORMATION OMITTED AND
FILED SEPARATELY WITH THE SEC.
<PAGE>
1.1 "ACT" means the Food, Drug and Cosmetic Act (21 U.S.C. ss.ss.
301 et seq.) and the regulations promulgated thereunder and all
foreign equivalents thereof.
1.2 "AFFILIATE" means any person or entity which, directly or
indirectly, through one or more intermediaries, controls, is
controlled by, or is under common control with, a party. "Control"
means the direct or indirect, legal or beneficial, (a) ownership of
more than 50% of the outstanding voting rights of such person or
entity or (b) the power or ability to direct the management or
policies of such person or entity.
1.3 "CONTROLS" means Products manufactured by CVDI which are used
for quality control purposes.
1.4 "FDA" means the United States Food and Drug Administration or
any successor agency, and all foreign equivalents thereof.
1.5 "GOOD MANUFACTURING PRACTICES" OR "GMP" means the applicable
current good manufacturing practices promulgated from time to time
by the FDA in accordance with the Act, and all foreign equivalents
thereof.
1.6 "HOME MARKET" means the market for Products used by patients
performing tests on themselves at home (i.e., outside of hospital,
institutional or physician office locations).
1.7 "INSTRUMENTS" means CVDI's manual, compact, single test,
portable analyzer, the TAS (thrombolytic assessment system), which
provides point of patient care evaluations of hemostasis, and the
Accent, portable compact microprocessor-based docking station to be
used in conjunction with the TAS for purposes of heparin
2
<PAGE>
management during surgical procedures. Instruments sold by Chiron
hereunder shall bear a Chiron label for all Instruments sold
subsequent to an initial interim period, approximately 120 days
after CVDI receives the necessary approved artwork from Chiron.
1.8 "NEW PRODUCTS" means improvements and enhancements to Routine
Products.
1.9 "PRODUCTS" means Routine Products, New Products, Specialty
Products and Instruments.
1.10 "ROUTINE PRODUCTS" means CVDI HMT, PT, aPTT and LHMT test
cards.
1.11 "SPECIALTY PRODUCTS" means any test cards sold by CVDI,
excluding Routine Products and New Products, as they become
available.
1.12 "SPECIFIED MARKETS" means the market for Products in the
hospital. Chiron shall be entitled to provide written notice to CVDI
that Chiron desires to add distribution rights in any market in
addition to the hospital market, other than the Home Market, for a
period of 120 days subsequent to the effective date of this
Agreement and any such market shall be added to the definition of
Specified Markets..
1.13 "TERRITORY" means the countries listed on Schedule 1.13.
2. DISTRIBUTION OF PRODUCT.
2.1 EXCLUSIVE RIGHTS.
3
<PAGE>
(a) GRANT. Subject to the limitations contained herein, CVDI
hereby grants to Chiron the sole and exclusive right to
sell, market, promote, distribute, and otherwise transfer,
dispose, provide and place ("sell"): (i) Routine Products
and New Products within the Territory in the Specified
Markets, and (ii) Specialty Products within the Territory
in the Specified Markets, but excluding the United States
and Canada from the definition of Territory for Specialty
Products. CVDI shall not, directly or indirectly, through
technology licensing or otherwise, grant any third party
any right to sell Routine Products in the Territory in the
Specified Markets during the term of this Agreement. CVDI
hereby grants to Chiron the non-exclusive right to sell,
market, promote, distribute, and otherwise transfer,
dispose, provide and place ("sell") Instruments within the
Territory in the Specified Markets during the term of this
Agreement. It is anticipated by the parties that Chiron
shall prepare for its distribution obligations between the
date hereof and the end of calendar year 1998 and that it
shall begin distribution on or about January 1, 1999.
(b) EXCEPTIONS. The rights granted in paragraph (a) above shall be
subject to the following exceptions:
(i) Notwithstanding any other provision or
implication of this Agreement, CVDI shall retain the
right to provide Routine Products, New Products and
Specialty Products to collaborative partners and other
entities participating in such collaborations and such
Routine Products, New Products and Specialty Products
shall bear the Chiron label in the
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Territory in the Specified Markets. Collaborative
partners shall mean entities collaborating with CVDI in
the development of new products.
(ii) Notwithstanding any other provision or
implication of this Agreement, none of the terms of this
Agreement shall apply to CVDI's sale of Products to the
customers of Dade International Inc. ("Dade") with whom
CVDI has contracted to supply Routine Products prior to
the Effective Date of this Agreement. Any sales to Dade
shall be: (i) made in accordance with the letter of
termination delivered to Dade by CVDI in connection with
Chiron's execution of this Agreement and in accordance
with the termination provisions of the Distribution
Agreement dated October 16, 1996, between CVDI and Dade,
(the "Dade Agreement"); and (ii) made for resale to
existing Dade customers that purchased Instruments prior
to termination of the Dade Agreement as specified in
such Dade Agreement..
2.2 EXCLUSIVITY. During the term of this Agreement, Chiron shall
not sell in the Territory in the Specified Markets any whole
blood or plasma, point of care Products except under the terms
of this Agreement. Neither Chiron nor any of its Affiliates or
distributors shall distribute Products outside the Territory.
2.3 REQUIREMENTS. Chiron shall purchase, and CVDI shall supply,
subject to the limitations of Section 5.7, all of Chiron's
requirements of Products, including Routine Products, New
Products, Specialty Products and Instruments for resale within
the Territory. During the term of this Agreement, and for a
period ending the later of five
5
<PAGE>
(5) years from the effective date hereof or three (3) years
subsequent to termination hereof, neither Chiron nor any of
its Affiliates shall manufacture any Products (using
technology based upon iron oxide particles in combination with
reagents in the presence of magnetic fields) or purchase any
Products (using technology based upon iron oxide particles in
combination with reagents in the presence of magnetic fields)
from a supplier other than CVDI.
2.4 PERFORMANCE REQUIREMENTS. Chiron shall use reasonable efforts,
as determined in Chiron's sole discretion, to promote the sale
of the Products. Chiron and CVDI contemplate that the
promotional efforts may include preparing promotional
materials to be used in the Territory by Chiron, participating
in appropriate trade shows, advertising in trade publications
applicable to the Territory and directly soliciting orders
from customers within the Territory by the appropriate Chiron
sales force as determined in Chiron's sole discretion. Chiron
shall be responsible for training customers with respect to
Products sold. CVDI will provide technical support to
customers in the United States through December 31, 1999, at
no additional cost to Chiron, except that Chiron shall pay
CVDI's travel and related expenses associated with providing
such technical support. Chiron will develop its own customer
technical support capabilities and will assume sole
responsibility for providing technical support to customers
after December 31, 1999. After December 31, 1999, Chiron shall
be entitled to contract with CVDI to supply technical support
and training on terms as mutually agreed upon by CVDI and
Chiron. CVDI and Chiron shall comply with the Act and other
applicable, legal, health and safety requirements, laws and
regulations in
6
<PAGE>
all of their marketing and sales activities. Chiron shall not
promote the Products for any uses not approved for Products by
applicable regulatory agencies.
2.5 TERMS AND CONDITIONS. All orders for Products shall be
initiated by written purchase orders. No order shall be
binding unless consistent with this Agreement. Acceptance by
CVDI of Chiron's purchase order is expressly limited to and
conditioned upon, and only upon, Chiron's acceptance of the
terms and conditions set forth in this Agreement, which may
not be changed or waived except in a writing signed by the
parties. Chiron's purchase orders submitted to CVDI shall be
governed by the terms of this Agreement and CVDI's published
Standard Terms and Conditions of Sale as in effect at the time
of such purchase; provided, however, that in the event of a
conflict between the terms of this Agreement and CVDI's
Standard Terms and Conditions of Sale, this Agreement shall
control and any additional, inconsistent or different terms
and conditions contained in any purchase order,
acknowledgment, confirmation, acceptance, invoice, or other
documents supplied by Chiron or CVDI are hereby expressly
rejected. A copy of CVDI's Standard Terms and Conditions of
Sale is attached hereto as Schedule 2.5. CVDI shall not
arbitrarily change its Standard Terms and Conditions. CVDI
shall limit its changes to correcting typographical errors,
conforming the terms and conditions to applicable law, and
changes to make the Standard Terms and Conditions consistent
with terms and conditions offered in the marketplace for
comparable products. CVDI shall advise Chiron in writing at
least thirty (30) days in advance of any proposed changes
(other than minor non-material corrections) to the Standard
Terms and Conditions. Chiron and CVDI agree that such
7
<PAGE>
orders and documents may include provisions which identify
Products, quantities of Products, shipping dates, delivery
information and prices and billing information in a manner not
inconsistent with this Agreement and such provisions shall be
binding on the parties.
2.6 REJECTION. Chiron and its distributors shall notify CVDI of
obvious damage relating to the manufacturing or packaging of
the Products (other than damage solely associated with the
shipping of the Products) within forty-five (45) days of their
respective receipt of the Products. Any such Product not
rejected for obvious damage within forty-five (45) days after
receipt by Chiron or its distributors (the "Rejection Period")
shall be deemed accepted. A rejection by Chiron shall mean
that CVDI has received within the Rejection Period written
notice of such rejection stating with particularity the reason
therefor. CVDI shall as promptly as possible replace any
rejected Products at no cost to Chiron or its distributors.
After the Rejection Period, Chiron may not return any such
obviously damaged Products for any reason without CVDI's prior
written consent.
2.7 EXPANSION OF TERRITORY.
(a) CVDI will promptly advise Chiron in writing of
opportunities for extension of Chiron's distribution rights
into any country outside the Territory in which CVDI desires
to expand or any country where existing rights lapse or are
subject to competitive bid or in any country in which CVDI
currently has a distribution agreement, in each case where
Chiron has a distribution network in place. CVDI agrees not to
enter into any contract for distribution rights in
8
<PAGE>
such other country until the earlier of the receipt of a
proposal from Chiron regarding such country or the expiration
of the ninety (90) day period following Chiron's receipt of
written notification pursuant to this sub-section. In
considering the award of any expansion territory, the parties
hereto agree to consider the relationship of CVDI and Chiron
and Chiron's performance hereunder as a criteria in making any
such award. Nothing in this sub-section shall limit the rights
of CVDI to solicit, review or negotiate with any party at any
time with respect to areas outside the Territory as the same
may exist from time to time.
(b) Notwithstanding the foregoing, if CVDI determines to
enter into any agreement or significant negotiations with a
third party granting distribution rights to such party with
respect to (i) Specialty Products in the United States or
Canada or (ii) Products in the Home Market, CVDI will promptly
advise Chiron in writing prior to entering into any such
negotiations or agreement granting any such distribution
rights to a third party. CVDI agrees not to enter into a
distribution agreement for (i) Specialty Products in the
United States or Canada or (ii) Products in the Home Market
until the earlier of the receipt of a proposal from Chiron
regarding such rights or the expiration of the ninety (90) day
period following Chiron's receipt of written notification
pursuant to this sub-section. In considering the award of any
such rights, CVDI agrees to consider the relationship of CVDI
and Chiron and Chiron's performance hereunder as a criteria in
granting such distribution rights. Nothing in this Sub-
9
<PAGE>
section shall limit the rights of CVDI to solicit, review or
negotiate with any party at any time with respect to such
distribution rights. The provisions of this subparagraph
relating to Chiron's opportunity to gain distribution rights
in the Home Market shall not be available to Chiron if Chiron
determines to enter any agreement with a third party relating
to the Home Market or if Chiron enters into significant
negotiations with a third party regarding the Home Market if
such third party is not CVDI. Chiron shall discuss with CVDI
its plans regarding the Home Market prior to entering the Home
Market and prior to entering into an agreement with a third
party relating to the sale of products to the Home Market.
(c) CVDI will use its best efforts to facilitate and aid
Chiron's negotiations with Tokuyama Soda Company, Ltd.,
(excluding the payment of any money) regarding distribution of
CVDI PT and aPTT cards in Japan, Korea and Taiwan.
(d) CVDI and Chiron will jointly develop and agree to a
worldwide distributor transition plan no later than November
30, 1998, such plan to provide for granting distributor
relationships in favor of Chiron as and when permitted under
any such existing distribution agreements.
3. MARKETING AND SUPPORT ACTIVITIES.
3.1 MARKETING MEETINGS; REPORTS. The parties shall meet at least
quarterly to discuss performance, sales and marketing plans,
pricing, customer support, product
10
<PAGE>
improvement suggestions and other information concerning the
marketing and development of the Products. Chiron shall
provide information available to it about the Products and
their ability to compete with other diagnostic products for
related uses and to meet customer needs. Chiron shall provide
CVDI general information regarding sales of the Products such
as broad pricing trends by geographic region as well as sales
information indicating sales by country or geographic region,
where available to Chiron.
3.2 PROMOTIONAL MATERIAL. CVDI will furnish Chiron with examples
of promotional literature and advertisements it prepares for
the Products. Chiron shall not copy or utilize any promotional
material prepared by it without obtaining the prior written
approval thereof from CVDI. CVDI's approval shall not be
unreasonably withheld or delayed. Chiron shall submit by
courier camera ready copy for the labels and package inserts
to CVDI for approval. CVDI shall respond within fourteen (14)
days of receipt. If no written objection is received from CVDI
within fourteen (14) days after the courier package is
received by CVDI, Chiron will contact CVDI to obtain CVDI's
approval for the copy as submitted, or as modified in
accordance with CVDI's instructions. If no written objection
is received by Chiron, approval by CVDI will be deemed to have
been granted after such contact and the lapse of ten (10)
days. CVDI and Chiron shall comply with all requirements of
the Act, local laws, regulations and other laws in their
advertising and other promotional activities.
3.3 PACKAGING, LABELING. CVDI shall manufacture, label and package
the Products in final form for distribution by Chiron. Chiron
shall provide camera ready copy for the
11
<PAGE>
labels containing Chiron trade dress. In addition to all
applicable legal requirements, the labels shall comply with
the requirements set forth in Section 3.4 below, shall display
"CVDI" and shall identify CVDI as the manufacturer of the
Products. Chiron shall not repackage or label any Products and
shall not alter any Products or any package or label used in
connection with any Products except as specifically authorized
by CVDI. In the event that CVDI shall authorize or require
repackaging or re-labeling, Chiron shall comply in all
respects with the instructions of CVDI, at the expense of
CVDI.
3.4. TRADEMARKS AND TRADE NAMES. CVDI hereby grants Chiron, the
nontransferable right to use in the Territory the trademarks
and tradenames listed on Schedule 3.4, and any other
trademarks owned by CVDI which it may designate in writing for
use by Chiron (the "Trademarks"), in connection with the
marketing and sale of the Products for the duration of the
Agreement. Chiron's distributors and Affiliates shall be
entitled to the use of such Trademarks, subject to the terms
and conditions of this Agreement, so long as such use is
authorized only in connection with distribution of Products
hereunder and subject to terms and conditions substantially
similar to those contained in this Agreement. The Products
shall be marketed and sold only under the Trademarks and the
name "CVDI" as required under Section 3.3 and such other marks
as Chiron may use for its other products. Each Product
marketed and sold shall conspicuously bear the name and
Trademarks of CVDI in addition to any Chiron marks. Chiron
acknowledges that it has and will obtain no proprietary
interest in the Trademarks and agrees not to use the same as
part of its corporate or business name.
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<PAGE>
Subject to the sale of any inventory existing as of the date
of any such termination, Chiron's, its distributors' and its
Affiliates' right to the use of any Trademark or other
property of CVDI shall terminate immediately upon termination
of this Agreement. Chiron shall use the Trademarks only in the
manner prescribed by CVDI. Chiron hereby grants CVDI the
nontransferable right to use in the Territory the trademarks
and tradenames listed on Schedule 3.4, and any other
trademarks owned by Chiron which it may designate in writing
for use by CVDI (the "Chiron Trademarks"), in connection with
the marketing and sale of the Products. During the term of
this Agreement, the Products shall be marketed and sold by
Chiron only under the Trademarks, the Chiron Trademarks, and
such other marks as CVDI may use for its other products. CVDI
acknowledges that it has and will obtain no proprietary
interest in the Chiron Trademarks and agrees not to use the
same as part of its corporate or business name. Subject to the
sale of any inventory or work-in process existing at the date
of any such termination, CVDI's right to the use of any Chiron
Trademark or other property of Chiron shall terminate
immediately upon termination of this Agreement. CVDI shall use
the Chiron Trademarks only in the manner prescribed by Chiron.
The Products are offered for sale and sold by Chiron and CVDI
subject in every case to the condition that such sale does not
convey any licenses, express or implied, to manufacture,
duplicate or otherwise copy or reproduce any Product. In the
event of termination of this Agreement, Chiron shall not
manufacture or have manufactured any devices, cards,
components or assemblies utilizing any information belonging
to CVDI.
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<PAGE>
3.5 MARKETING ASSISTANCE/TRAINING. CVDI agrees to provide
technical training, and technical assistance to Chiron
personnel at periodic intervals, with the frequency and
content to be determined by mutual agreement. Such training
will be provided by CVDI at no additional cost to Chiron,
except that Chiron shall pay CVDI's travel and related
expenses associated with providing such training.
3.6 SERVICE. Except as otherwise provided in this Section, CVDI
agrees to provide service and maintenance for Instruments sold
by Chiron for its standard fees as set forth on Schedule 3.6,
and thereafter, as such fees change from time to time, and in
accordance with CVDI's then applicable standard service
agreement. CVDI shall offer to Chiron service contracts for
Instruments to Chiron customers to provide maintenance and
services in accordance with its standard contract. CVDI shall
provide Chiron with its service contract price list and, at
its option, Chiron shall be entitled to sell such contracts to
Chiron customers on behalf of CVDI. Chiron shall bill for the
service contracts which it sells and payment by Chiron to CVDI
shall be within thirty (30) days after Chiron receives payment
for such service/maintenance contract. Service and maintenance
shall be provided by CVDI or an independent third party
service company. To the extent that CVDI intends to contract
with a third party for service and maintenance of the
Products, CVDI will promptly advise Chiron in writing of the
opportunity for Chiron to perform such service and
maintenance.
3.7 PRODUCT WARRANTY. Neither party nor its subdistributors shall
make any representation or warranty about the Products,
whether in writing or orally, except as is contained in
written materials delivered to Chiron by CVDI expressly for
use in
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<PAGE>
promoting the sale of the Product or as may otherwise be
agreed to by CVDI in writing.
4. PRODUCT DEVELOPMENT.
4.1. DEVELOPMENT BY CVDI. CVDI shall consult with Chiron from time
to time about improvements which may be desired by Chiron and
end users without obligation to CVDI. Chiron may, in its sole
discretion, provide product suggestions, information about
integration with its critical care instruments and data
management systems, results of focus sessions and other
expectations of end users, and access to technology available
to it which may be useful to CVDI. CVDI will evaluate
integrating its technology into Chiron's products. Chiron
agrees to take no action to modify or change CVDI's technology
or the Products in any way without the prior written consent
of CVDI.
4.2 RIGHTS TO PRODUCTS AND NEW PRODUCTS. CVDI shall own all right,
title, and interest in and to the know-how and technology
relating to the Products.
5. REGULATORY COMPLIANCE.
5.1 REGISTRATIONS.
(a) CVDI shall use commercially reasonable efforts to
obtain and maintain regulatory approvals and requirements for
it to sell the Products in the Territory. CVDI agrees to
cooperate with Chiron in any regulatory process to permit
Chiron to participate in such process where feasible. CVDI
shall have
15
<PAGE>
sole discretion as to the commercial reasonableness of any
acts required on its part to maintain any regulatory approval
or requirement.
(b) CVDI shall promptly provide to Chiron copies of all
required Product notifications and registrations to regulatory
agencies (including device listing reports).
5.2 REPORTING OBLIGATIONS. Chiron shall maintain, or cause to be
maintained, all complaint files and other records required to
be maintained by the FDA and other regulatory agencies with
respect to Products purchased by Chiron from CVDI. CVDI shall
promptly provide to Chiron copies of all complaints received
with respect to the Products sold to Chiron as well as
responses sent, if any. Chiron shall promptly provide CVDI
with copies of any complaints relating to the Products
received by Chiron. Except to the extent Chiron is otherwise
required by law, CVDI shall submit to the FDA all reports of
complaints, malfunctions, failures or deterioration in the
characteristics or performance or instructions for use or
inadequacy in labeling which may have led or lead to death or
serious injury and all other information about the Products
required to be submitted to any regulatory agency, including
the reports required under 21 CFR Parts 803 and 804 applicable
to the Products.
5.3 MANUFACTURING. CVDI shall use its best efforts to comply with
all applicable GMP requirements, including all national
technical and quality standards applicable to the Products
which are incorporated into GMP. From time-to-time, with
reasonable prior notice to CVDI, Chiron may inspect CVDI
facilities and upon reasonable request, review CVDI's methods
used to audit its subcontractors for GMP compliance. CVDI
16
<PAGE>
shall have sole discretion as to the commercial reasonableness
of any acts required on its part with respect to GMP
compliance, provided, however, CVDI shall notify Chiron of any
citations from discussions with a regulatory body where such
discussions and citations relate to a material aspect of GMP
compliance.
5.4 SAMPLES. CVDI shall retain samples of each lot of the Products
for time periods which are in accordance with GMP.
5.5 PRODUCT RECALLS AND FIELD CORRECTIVE ACTIONS. In the event (i)
any government authority issues a directive or order that a
Product be recalled, (ii) a court of competent jurisdiction
orders such a recall or (iii) CVDI determines that a Product
should be recalled or that a Field Corrective Action should
occur, the parties shall take all appropriate corrective
action. Chiron will provide notice to customers of the recall
of the Products. Upon determination of the party responsible
for the recall or Field Corrective Action, such party shall be
responsible for the cost of notifying end users and for
determining the corrective actions to be taken and the costs
associated with such actions. CVDI and Chiron shall fully
cooperate with one another and provide all reasonable
assistance in conducting any recall or Field Corrective Action
under this Paragraph. Chiron shall maintain records of all
sales of the Products sufficient to carry out a recall with
respect to Products purchased under the Agreement.
5.6 GENERAL OBLIGATIONS OF CVDI AND CHIRON.
(a) Except as otherwise expressly provided in the
Agreement, CVDI shall manufacture, test, package, and label
the Products pursuant to the terms,
17
<PAGE>
conditions and subject to the limitation contained in this
Agreement. Chiron shall price, invoice and have shipped in the
Territory or in the Specified Markets, all Products pursuant
to the terms, conditions and subject to the limitations
contained in this Agreement.
(b) CVDI shall manufacture, test, package, label and
release and Chiron shall maintain, store and ship the Products
in accordance with all applicable GMP requirements.
(c) Each party shall promptly notify the other party of,
and shall provide the other party with copies of, any
correspondence and other documentation received or prepared in
connection with any of the following events: (1) receipt of
any material correspondence from the FDA in connection with
the manufacture, sale or use of the Products; (2) any recall
of the Products; (3) the withdrawal of the Products from the
market; (4) any regulatory comments relating to the
manufacture of the Products requiring a response or action by
either party.
(d) CVDI shall maintain all manufacturing and analytical
records, all records of shipments of the Products from CVDI,
and all validation data relating to the Products for the time
periods required by applicable laws and regulations. CVDI
shall make such data available to the FDA upon request of the
FDA, such request being made either directly to Chiron or to
CVDI, or otherwise as required by applicable law.
5.7 ORDERS.
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(a) FORECASTS. Beginning with the execution hereof,
Chiron shall provide monthly, by the fifteenth day of each
month, its estimated forecast of its requirements for the
Products for each of the six (6) months following the end of
the month in which such forecast is submitted (each a
"Forecast"). All Forecasts under this Agreement and updates
thereof for any period will constitute a firm obligation of
Chiron to purchase the quantities of Products indicated for
the first three months of such Forecast.
(b) DELIVERY. CVDI shall use its best efforts to supply
the Products ordered by Chiron and shall supply Products in
accordance with the delivery schedule and in the quantities
specified by Chiron provided; however, CVDI shall not be
obligated to deliver Products to the extent that orders for
such Products exceed 125% of the quantities stated in the
portion of any forecast which contains the firm obligation of
Chiron to purchase Products. CVDI shipments of Products shall
be delivered FOB freight collect CVDI's distribution site,
Raleigh, North Carolina, to Chiron's carrier at which time
title, ownership and risk of loss and damage shall pass to
Chiron. CVDI shall deliver Products, properly packed for
distribution (including, but not limited to refrigerated
distribution), to the carrier selected by Chiron at its
distribution site. All freight and insurance expenses, as well
as any special handling or special packing expenses requested
by Chiron, shall be paid by Chiron. (Packing for refrigerated
distribution is not a special packing expense.) Chiron shall
bear any and all applicable taxes, duties and similar charges
that may be assessed against the Products after
19
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delivery to the carrier at CVDI's distribution site. CVDI
shall include shipping documents with Products in accordance
with Chiron's reasonable requests.
5.8 PACKAGING. All labels and labeling produced by CVDI for
Products, including packaging layout, design and color, shall
be consistent with artwork supplied or approved by Chiron.
CVDI shall provide all necessary labels and package inserts
for all Products, as well as for the shipping container, which
labels and package inserts shall comply with applicable FDA
requirements. Chiron shall not use any other labels or package
inserts for any of such Products.
5.9 TAXES; DUTIES. The actual amount of sales, use, excise,
value-added and similar taxes levied upon or applicable to the
transfer of Products to Chiron are payable by Chiron. Chiron
and its Affiliates shall pay all duties, tariffs, surcharges
and other customs and other governmental fees levied in
connection with the export of Products outside of the United
States but within the Territory.
6. PRODUCT WARRANTY.
6.1 STANDARD LIMITED WARRANTY. CVDI warrants that the Routine
Products, New Products and the Specialty Products shall, at
the time of shipment, (a) comply with the requirements of the
Act, if applicable, and shall until their expiration date
conform to the labeling and package inserts approved by CVDI;
(b) will not be products that are adulterated or misbranded
within the meaning of the Act; (c) shall have been
manufactured, packaged, stored and shipped in conformity with
applicable GMP
20
<PAGE>
requirements; and (d) will not be products that may not be
introduced into interstate commerce pursuant to applicable
federal or state law.
CVDI will use its best efforts to give Chiron a minimum of
ninety (90) days advance notice of any material changes in the
form or functionality of the Products. CVDI warrants that all
Instruments shall, until the earlier of twenty-four (24)
months from shipment by CVDI or twelve (12) months after the
date of installation with the customer: (a) comply with the
requirements of the Act, if applicable, and shall conform to
the labeling and package inserts approved by CVDI; (b) will
not be products that are adulterated or misbranded within the
meaning of the Act; (c) shall have been manufactured,
packaged, stored and shipped in conformity with applicable GMP
requirements; and (d) will not be products that may not be
introduced into interstate commerce pursuant to applicable
federal or state law.
This limited warranty is contingent upon proper use of a
Product in the application for which such Product was intended
and does not cover Products that were modified without CVDI's
written approval, that have expired, or that were improperly
stored or handled. Except as set forth in Schedule 6.1, as of
the date of the execution of this Agreement, CVDI has no
knowledge that any of the Products, or the sale or use of any
of the Products for their intended purposes infringe any
intellectual property of any third party.
6.2 NO OTHER WARRANTY. EXCEPT FOR THE EXPRESS LIMITED WARRANTIES
SET FORTH IN SECTION 6.1 ABOVE, CVDI GRANTS NO WARRANTIES FOR
THE PRODUCTS, EXPRESS OR IMPLIED, EITHER IN FACT OR BY
21
<PAGE>
OPERATION OF LAW, BY STATUTE OR OTHERWISE, AND CVDI
SPECIFICALLY DISCLAIMS ANY IMPLIED WARRANTY OF QUALITY,
WARRANTY OF MERCHANTABILITY, WARRANTY OF FITNESS FOR A
PARTICULAR PURPOSE OR WARRANTY OF NON-INFRINGEMENT.
6.3 REMEDY AND LIMITATION OF LIABILITY. EXCEPT AS OTHERWISE
PROVIDED HEREIN, CVDI'S LIABILITY AND CHIRON AND ITS
AFFILIATES, ITS DISTRIBUTORS AND ITS CUSTOMERS SOLE REMEDY
UNDER THE LIMITED WARRANTY UNDER ARTICLE 6 HEREOF WITH RESPECT
TO ANY PRODUCTS SHALL BE LIMITED TO A REFUND OF CHIRON'S COST
OF THE PRODUCTS OR REPAIR OR REPLACEMENT, IN ALL EVENTS AT
CVDI'S SOLE DISCRETION. EXCEPT AS OTHERWISE PROVIDED HEREIN,
IN NO EVENT SHALL CVDI BE LIABLE FOR THE COST OF PROCUREMENT
OF SUBSTITUTE PRODUCT OR FOR ANY-SPECIAL, CONSEQUENTIAL OR
INCIDENTAL DAMAGES FOR BREACH OF WARRANTY OR OTHERWISE. CVDI
SHALL BEAR THE EXPENSE OF FREIGHT FOR ALL RETURNED GOODS.
6.4 CARD DATING. CVDI guarantees to deliver all Routine Products
within three (3) months of the date of manufacture and with a
minimum of nine (9) months dating at the time of such
delivery.
6.5 ASSERTION OF CLAIMS. In any case where Chiron expects to make
a claim against CVDI with respect to nonconforming Product,
Chiron shall retain the Product for the lesser of thirty (30)
days or receipt of written authorization and instructions of
CVDI
22
<PAGE>
either to dispose of the Product or to return the Product to
CVDI. Chiron will provide CVDI proof of destruction of cards
when requested by CVDI.
6.6 YEAR 2000 COMPLIANCE. Subject to the limitations set forth in
this Article 6, CVDI certifies to Chiron that all Products are
year 2000-compliant.
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<PAGE>
7. PAYMENTS FOR PRODUCT.
7.1 PURCHASE PRICE. Except as provided otherwise herein, Chiron or
an Affiliate of Chiron shall pay CVDI a purchase price per
Routine Product (the "Card Purchase Price") of US$[ ]. Except
as otherwise provided herein, Chiron or an Affiliate of Chiron
shall pay CVDI a purchase price per Instrument (the
"Instrument Purchase Price") of US$[ ]. The parties shall
negotiate in good faith the purchase price of Specialty
Products. Schedule 7.1 sets forth the initial prices at which
CVDI will sell to Chiron Products other than Instruments and
Routine Products. Such prices are subject to adjustment from
time to time but prices shall not be increased to exceed the
increase in the Producer Price Index for the immediately prior
calendar year, such an adjustment to begin not earlier than
January 1, 2000.
7.2 CHIRON COMMITMENT. Chiron agrees to purchase from CVDI a
minimum of [ ] Instruments by December 31, 1999, and minimums
of (i) an additional [ ] Instruments by December 31, 2000,
(ii) an additional [ ] Instruments by December 31, 2001, (iii)
an additional [ ] Instruments by December 31, 2002 and (iv)
and additional [ ] Instruments by December 31, 2003. Chiron
agrees that its commitment to purchase the minimum number of
Instruments in any given calendar year shall be deemed
fulfilled only if it purchases at least 40% of the applicable
minimum number semi-annually (by June 30 and by December 31)
in each such calendar year.
- ------------------
[ ] CONFIDENTIAL TREATMENT REQUESTED; CERTAIN INFORMATION OMITTED AND
FILED SEPARATELY WITH THE SEC.
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<PAGE>
7.3 ADJUSTMENTS TO THE PURCHASE PRICE. The Card Purchase Price
shall be subject to adjustment as set forth below based on
CVDI test card volume.
Annualized Monthly Card Purchase
CVDI Card Volume CVDI Card Volume Range Price
0 to [ ] cards 0 to [ ] cards $[ ]
[ ] to [ ] to
[ ] cards [ ] cards $[ ]
[ ] to [ ] to
[ ] cards [ ] cards $[ ]
[ ] to [ ] to
[ ] cards [ ] cards $[ ]
[ ] to [ ] to
[ ] cards [ ] cards $[ ]
For purposes of adjusting the Card Purchase Price, test card
volume shall include volume from all revenue sources for sales of
test cards by CVDI ("CVDI Card Volume").
The Card Purchase Price shall initially be US$[ ]. If in any
three (3) consecutive months during the term of this Agreement, the
CVDI Card Volume in each such month (the "Monthly CVDI Card Volume")
exceeds the Monthly CVDI Card Volume Range shown above for the Card
Purchase Price then in effect, the Card Purchase Price for purchases
subsequent to that three (3) month period shall be adjusted as shown
above to reflect the increase in Monthly CVDI Card Volume, and such
adjusted price shall remain in effect until at the end of any month,
either (a) Monthly CVDI Card Volume for each of the preceding three
(3) consecutive months (including that month) exceeds the Monthly
CVDI Card Volume Range shown above for the Card Purchase Price then
in effect or (b) Monthly CVDI Card
- ------------------
[ ] CONFIDENTIAL TREATMENT REQUESTED; CERTAIN INFORMATION OMITTED AND
FILED SEPARATELY WITH THE SEC.
25
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Volume for that month falls below the Monthly CVDI Card Volume Range
shown above for the Card Purchase Price then in effect, and in each
case, the Card Purchase Price shall be adjusted up or down
accordingly. For example, if Monthly CVDI Card Volume increases to
between [ ] and [ ] cards each month and Monthly CVDI Card Volume is
maintained at this level for three (3) consecutive months, the Card
Purchase Price for purchases subsequent to that three (3) month
period would be adjusted down to $[ ]. Such adjusted price would
remain in effect until either (a) Monthly CVDI Card Volume exceeds [
] cards in each of any three (3) consecutive months, in which case
the Card Purchase Price would be adjusted downward, or (b) Monthly
CVDI Card Volume falls below [ ] cards in any month, in which case
the Card Purchase Price would be adjusted upward to the Card
Purchase Price payable for the actual Monthly CVDI Card Volume
achieved. CVDI shall review with Chiron, on an annual basis, market
conditions and other factors which may affect pricing; provided,
however, there shall be no obligation on the part of CVDI to change
its pricing as a result of any such meeting.
(b) SAMPLES, ETC. Upon Chiron's request, during each
calendar year in which this Agreement is in effect, CVDI shall
supply (i) an estimated [ ] (with up to [ ] available) Routine
Product test cards (excluding CVDI LHMT test cards) for
training purposes, such cards to be priced at a [ ]% discount
on the Card Purchase Price then in effect, and (ii) samples of
all other test cards for demonstration purposes, such cards to
be priced at the
- ------------------
[ ] CONFIDENTIAL TREATMENT REQUESTED; CERTAIN INFORMATION OMITTED AND
FILED SEPARATELY WITH THE SEC.
26
<PAGE>
Card Purchase Price then in effect. Products provided in
accordance with clause (i) above will be clearly marked as
samples not for patient evaluation purposes.
7.4 MINIMUM SALES TO MAINTAIN DISTRIBUTION RIGHTS.
(a) CVDI shall be entitled to terminate this Agreement
in the event that Chiron fails to meet its semiannual or
annual minimum sales of Products to end users in the United
States or Canada, or ship to distributors in other countries
in the Territory, calculated at the end of each six (6) month
calendar period (by June 30 and by December 31) or calendar
year (by December 31), as applicable, and determined by
reference to sales levels as follows:
2001 2002 2003
---- ---- ----
Annual Minimum Sales of
Routine Cards and Specialty
Cards by Chiron (by December
31) [ ]
Semiannual Minimum Sales of
Routine Cards and Specialty
Cards by Chiron (by June 30
and by December 31) [ ]
Annual Minimum Sales of TAS
analyzers by Chiron (by
December 31) [ ]
Semiannual Minimum Sales of
TAS analyzers by Chiron (by
June 30 and by December 31) [ ]
In the event Chiron fails to meet its semi-annual minimum
sales as set forth above in any period, prior to any
termination by CVDI, Chiron and CVDI
- ------------------
[ ] CONFIDENTIAL TREATMENT REQUESTED; CERTAIN INFORMATION OMITTED AND
FILED SEPARATELY WITH THE SEC.
27
<PAGE>
shall have thirty (30) days to develop a mutually agreeable
plan to meet the relevant annual sales amount. If a mutually
agreeable plan is executed before the end of such period, CVDI
shall have no right of termination with respect to such
semi-annual period.
(b) Notwithstanding anything to the contrary in this
Agreement, at any time upon sixty (60) days' written notice
where Chiron fails to maintain a distribution network or other
sales presence in any country within the Territory other than
the United States and Canada, and such failure persists beyond
such sixty (60) day period, CVDI shall be entitled to
terminate this Agreement with respect to the grant of
distribution rights for that specific country.
7.5 PAYMENT. All CVDI invoices shall be paid net 30 days from date
of invoice in US Dollars; provided, however, that if a
customer will only accept a single lot of material over an
extended period of time, payment for such CVDI invoices shall
be paid net sixty (60) days from date of CVDI's invoice in US
Dollars. Chiron shall provide CVDI with documentation of such
arrangements. Any invoiced amounts not paid when due shall be
subject to a service charge at the lower of the rate of one
and one-half (1.5%) percent per month or the maximum rate
permitted by law. If Chiron fails to make any payment to CVDI
when due, CVDI shall give Chiron written notice of such
non-payment and Chiron shall have ten (10) days from the
receipt of such notice to make the payment. CVDI may upon
thirty (30) days written notice to Chiron without affecting
any other rights under this Agreement, terminate this
Agreement or cancel or
28
<PAGE>
delay shipments hereunder to Chiron for non-payment by Chiron
after such ten (10) day period.
8. CONFIDENTIALITY.
8.1 "PROPRIETARY INFORMATION" means: all financial information,
marketing information, sales information, customer
information, raw materials, know-how, drawings, compositions,
manufacturing and other specifications, analytical procedures,
flow sheets, reports, market studies, preclinical and clinical
test results, FDA and other regulatory submissions, software
and other medical, research, technical, and marketing
information disclosed, directly or indirectly, by either party
or any of its Affiliates to the other party, retroactively to
December 17, 1997, in writing, marked "Confidential",
"Proprietary" or the like, or, if transmitted orally or by
observation of equipment or other material, confirmed by a
writing so marked within sixty (60) days of its disclosure, or
which by its nature is information normally intended to be
held in confidence, unless the same: (a) is or becomes public
knowledge through no fault of the receiving party; (b) is
legally in the possession of the receiving party prior to
receipt from the disclosing party; (c) is subsequently and
lawfully received from a third party without its breach of any
nondisclosure obligation; or (d) is independently developed by
employees of the receiving party who have had no access to the
Proprietary Information of the disclosing party.
Notwithstanding the immediately preceding sentence, CVDI
agrees that all new materials and other information which
Chiron provided to CVDI prior to December 17, 1997, shall be
treated as Proprietary Information.
29
<PAGE>
8.2 NON-DISCLOSURE. During the duration of this Agreement and for
a period of five (5) years thereafter, neither party shall
disclose to third parties, or use for its benefit, in whole or
in part, any Proprietary Information received from other
party, except to the extent required to comply with the Act or
other laws. Each party shall take all reasonable steps to
minimize the risk of disclosure of Proprietary Information,
including, without limitation:
(a) ensuring that only its employees whose duties
require them to possess such information have access thereto;
and
(b) exercising at least the same degree of care that it
uses for its own Proprietary Information.
8.3 DUTIES UPON TERMINATION. Except as otherwise permitted under
this Agreement, upon request by the disclosing party after
expiration or termination of this Agreement, the other party
shall either return all of such disclosing party's Proprietary
Information (including data, memoranda, drawings and other
writings and tapes and all copies thereof) received or
prepared by it or destroy the same, and in any event shall
make no further use of such Proprietary Information at any
time provided, however, that counsel for the receiving party
may keep one copy of the Proprietary Information for purposes
of ascertaining the receiving party's obligations pursuant to
this Section 8.
8.4 USE OF PROPRIETARY INFORMATION. During the duration of this
Agreement and for a period of five (5) years thereafter,
neither party shall use the other party's Proprietary
Information for any purposes, except to perform its
obligations hereunder. In no event
30
<PAGE>
shall Chiron use any Proprietary Information for commercial
purposes subsequent to the termination of this Agreement.
8.5 INJUNCTIVE RELIEF. Each party acknowledges that the other
party would not have an adequate remedy at law for breach of
any of the covenants contained in this Section 8 and hereby
consents to the enforcement of same by the other party by
means of temporary or permanent injunction issued by any court
having jurisdiction thereof and further agrees that the other
party shall be entitled to assert any claim it may have for
damages resulting from the breach of such covenants in
addition to seeking injunctive or other relief. The provisions
of this Agreement relating to Proprietary Information shall
supercede any prior agreements relating to Proprietary
Information between Chiron and CVDI.
9. INDEMNIFICATION.
9.1 INDEMNIFICATION BY CVDI. Subject to Chiron's compliance with
its obligations set forth in Section 9.3 below, CVDI shall
indemnify, defend and hold Chiron, its Affiliates,
subdistributors, their directors, officers, employees and
agents harmless from and against any and all losses, damages,
liabilities, claims, demands, judgments, settlements, costs
and expenses (including, without limitation, reasonable
attorneys' fees and other costs of defense) (collectively
"Losses") attributable to, or arising out of a breach by CVDI
of any of CVDI's warranties, representations, covenants or
obligations hereunder or any claim, lawsuit or other action by
a third party for, breach of contract, personal injury or
property damage to the extent caused by a breach by CVDI of
this Agreement, or out of or connected with the use or sale of
the Product to
31
<PAGE>
the extent directly caused by CVDI's fault, negligence or
breach of any of its obligations hereunder concerning the use
or sale of the Product.
9.2 INDEMNIFICATION BY CHIRON. Subject to Chiron's compliance with
its obligations set forth in Section 9.3 below, Chiron shall
indemnify, defend and hold CVDI and its Affiliates, their
shareholders, directors, officers, employees and agents
harmless from and against any and all Losses attributable to,
or arising out of a breach by Chiron of any of Chiron's
warranties, representations, covenants or obligations
hereunder, or any claim, lawsuit or other action by a third
party for, breach of contract, personal injury or property
damage to the extent caused by a breach by Chiron or any of
its Affiliates of this Agreement, or out of or connected with
the use or sale of the Product to the extent directly caused
by Chiron's fault, negligence or breach of any its obligations
hereunder concerning the use or sale of the Product.
9.3 NOTICE AND ASSISTANCE. A party (the "indemnitee") which
intends to claim indemnification under this Section 9 shall
promptly notify the other party (the "indemnitor") in writing
of any action, claim or other matter in respect of which the
indemnitee or any of its employees or agents intend to claim
such indemnification. The indemnitee shall permit, and shall
cause its employees and agents to permit, the indemnitor, at
its discretion, to settle any such action, claim or other
matter and agrees to the complete control of such defense or
settlement by the indemnitor; provided, however, that such
settlement does not adversely affect the indemnitee's rights
hereunder or impose any obligations on the indemnitee in
addition to those set forth herein in order for it to exercise
such rights. No such action, claim or other matter shall
32
<PAGE>
be settled without the prior written consent of the indemnitor
and the indemnitor shall not be responsible for any legal fees
or other costs incurred other than as provided herein. At the
expense of the indemnitor, the indemnitee shall render the
indemnitor all assistance reasonably necessary in defending
against such claim, suit, or action. The indemnitee party
shall have the right at its expense, to retain separate
counsel to act in an advisory capacity in connection with any
matter involving a claim for indemnity and the indemnitor will
cooperate with such counsel.
10. PATENTS.
10.1 OWNERSHIP. Except as provided herein with respect to
trademarks, Chiron acknowledges that it does not have, nor
does it hereby acquire, any right, title and interest in and
to any patents, patent applications, trademarks or other
proprietary rights of CVDI owned by CVDI at the time of the
execution of this Agreement. Except as provided herein with
respect to trademarks, CVDI acknowledges that it does not
have, nor does it hereby acquire, any right, title and
interest in and to any patents, patent applications,
trademarks or other proprietary rights of Chiron owned by
Chiron at the time of the execution of this Agreement.
10.2 PATENT INFRINGEMENT.
(a) DEFENSE. Chiron agrees that CVDI has the right to
defend or at CVDI's option to settle, and CVDI agrees at
CVDI's expense, to defend or at CVDI's option to settle, each
claim, suit or proceeding brought against Chiron or Chiron's
customers arising out of or related to an allegation of
infringement of
33
<PAGE>
any United States patent, copyright, or trademark or
misappropriation of trade secrets by the sale of Products sold
hereunder or the use thereof, subject to the limitations
hereinafter set forth. CVDI shall have sole control of any
such action or settlement negotiations, and CVDI agrees to
pay, subject to the limitations hereinafter set forth, any
final judgment (including all prejudgment and post-judgment
interest) entered against Chiron or Chiron's customers on such
issue in any such suit or proceeding defended by CVDI. Chiron
agrees that CVDI at CVDI's sole option, shall be relieved of
the foregoing obligations unless Chiron shall notify CVDI
promptly in writing of such claim, suit or preceding and give
CVDI authority to proceed as contemplated herein, and at
CVDI's expense, cooperates with CVDI to settle and/or defend
any such claim, suit or proceeding. CVDI shall not be liable
for any costs or expenses incurred without CVDI's written
authorization.
(b) LIMITATION. Notwithstanding the provisions of
subsection 10.2(a) above, CVDI assumes no liability for (i)
infringements covering completed Products when used in
combination with another product or products or any
composition, assembly, combination method or process in which
any of the Products may be used when used in combination with
another product or products; provided, however, that such
limitation shall not apply where the sale or use of the
Product (whether or not in any composition, assembly,
combination, method or process) is a sale for a use or a use
intended or approved by CVDI; (ii) infringements involving any
marking or branding not
34
<PAGE>
applied by CVDI or applied at the request of Chiron; or (iii)
infringements involving the modification or servicing of the
Products, or any part thereof unless such modification or
servicing was performed by CVDI or in accordance with CVDI's
written instructions or approved by CVDI.
(c) THE FOREGOING PROVISIONS OF THIS SECTION 10.2 STATE
THE ENTIRE LIABILITY AND OBLIGATION OF CVDI AND THE EXCLUSIVE
REMEDY OF CHIRON, ITS AFFILIATES, DISTRIBUTORS AND CUSTOMERS
WITH RESPECT TO ANY ALLEGED INFRINGEMENT OF PATENTS,
COPYRIGHTS, TRADEMARKS, OR OTHER INTELLECTUAL PROPERTY RIGHTS
BY THE PRODUCTS OR ANY PART THEREOF.
(d) PATENT ENFORCEMENT. If Chiron believes that a third
party is reasonably likely infringing CVDI's patent rights in
the Territory, Chiron shall promptly notify CVDI of that fact
and shall provide to CVDI reasonable evidence of any such
claim based upon materials available to Chiron. Upon receipt
of evidence satisfactory to CVDI of infringement, in CVDI's
sole discretion CVDI shall then have the sole right to take
action against such infringing third party. If CVDI fails to
take commercially reasonable action within two (2)months to
stop such infringement, and such infringement, if allowed to
continue, would have a substantial effect on Chiron's sales of
the Product, Chiron shall then be entitled to take
commercially reasonable action to stop such infringement,
including the filing of suit; provided, that Chiron shall not
have such right so
35
<PAGE>
long as CVDI is then diligently taking action against at least
one infringing third party in at least one country in the
Territory. For purposes of this Section 10.2(b), "commercially
reasonable action" requires at a minimum advising the
infringing party to cease and desist its infringement. For
purposes of this Section 10.2(b), "substantial effect on
Chiron's sales of the Product" means a third party offering
for sale the Product or an equivalent of the Product. For
purposes of this Section 10.2(b), "diligently taking action"
means that CVDI has filed at least one patent infringement
lawsuit against at least one infringer in at least one
country. Any recovery of damages or settlement amounts from
any court actions or out of court actions shall be divided as
follows: one hundred percent to cover costs of the parties
until expenses are reimbursed in full and thereafter seventy
five percent to CVDI and twenty-five percent to Chiron. CVDI
shall have the right to settle any such action. Chiron shall
have the right to renegotiate its minimum performance
obligations under Sections 7.2 and 7.4 to the extent they may
be affected by such third party sales of the Product(s) in the
Territory.
(e) COOPERATION. If either party takes action against a
third party pursuant to this Section 10.2, or if a third party
claims the manufacture, use or sale of Product in the
Territory infringes its patent or other proprietary rights,
the other party agrees to provide reasonable assistance by
supplying information within its control which may assist the
party taking the enforcement action or defending such claim.
36
<PAGE>
10.3 DISTRIBUTION RIGHTS. CVDI hereby grants to Chiron the right to
act as its authorized distributor in the Territory to sell the
Products for the term of this Agreement. During the term of
this Agreement CVDI shall not bring any claim or action
against Chiron or any of its Affiliates for the infringement
or misappropriation of any intellectual property owned or
licensed to CVDI based upon the use or sale by Chiron or any
of its Affiliates of Products pursuant to the terms and
conditions of this Agreement.
11. TERM; TERMINATION.
11.1 TERM. The initial term of this Agreement shall be from the
Effective Date until December 31, 2003, unless terminated
earlier under the provisions of this Agreement. The parties
intend to renew this Agreement at the end of each five-year
period (subject to the parties' renegotiation in good faith of
minimum purchase and price provisions) unless at least one
hundred eighty (180) days prior to the end of any five year
term, either party provides to the other written notice of its
intent to terminate. CVDI shall evaluate the performance of
Chiron during each such five-year term and shall not be deemed
to be acting in good faith with respect to any renewal in the
event that it is unwilling to renew where (i) Chiron is
achieving its minimum sales obligations and (ii) Chiron is
willing to commit to increasing minimum sales requirements
each year of the renewal period to be negotiated in good
faith.
11.2 TERMINATION FOR CAUSE -- EITHER PARTY. Without prejudice to
any other rights it may have hereunder or at law or in equity,
either party may terminate this Agreement immediately by
written notice to the other party upon the occurrence of any
of the following:
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<PAGE>
(a) the other party becomes insolvent, an order for relief is
entered against the other party under any bankruptcy or
insolvency laws or laws of similar import;
(b) the other party makes an assignment for the benefit of its
creditors or a receiver or custodian is appointed for it or
its business is placed under attachment, garnishment or other
process involving a significant portion of its business;
(c) after sixty (60) days' written notice from the terminating
party without cure by the other party of any material breach
of this Agreement by the other party not involving minimum
sales or payments;
(d) the failure by Chiron to make any payment due under this
Agreement consistent with the terms contained in Section 7.3;
(e) the failure by Chiron to maintain sales to end users as set
forth in sub-section 7.4(b);
(f) after sixty (60) days written notice from CVDI, without cure
by Chiron, in the event of the sale of products by a
distributor appointed by Chiron in the Territory which are
competitive with the Products; or
(g) the "change of control" of CVDI. Change of control of CVDI
shall be defined as (i) the merger or consolidation of CVDI
with a third party where CVDI is not the surviving entity or
(ii) the sale of all or substantially all of CVDI's assets or
(iii) the sale or transfer of all or substantially all of
CVDI's rights related to
38
<PAGE>
the manufacture and sale of products
in CVDI's Routine Product or Specialty Product division.
(h) The "change of control" of Chiron where Chiron or the
successor entity, as the case may be, competes with CVDI
with respect to rapid diagnostic testing of hemostasis in
the Territory in the Specified Markets. For purposes of
this Section 11.2(h), "change of control" of Chiron shall
have the meaning set forth in Section 10.1(d) of the Common
Stock Purchase Agreement between Chiron and CVDI, dated as
of the date hereof.
11.3 RIGHTS AND DUTIES UPON TERMINATION.
(a) Termination of this Agreement, for whatever reason, shall not
affect any rights or obligations accrued by either party prior
to the effective date of termination, including under any
purchase order for Products placed prior to the effective date
of termination.
(b) Except as provided otherwise in this Section 11.3, upon
termination of this Agreement, CVDI shall use reasonable
efforts to continue to sell and supply Products to Chiron and
its Affiliates in such quantities as ordered but in quantities
no greater than reasonably appropriate in connection with
fulfilling contractual commitments to customers of Chiron, its
Affiliates and its subdistributors for a period not to exceed
twelve (12) months; provided, however, that such customers are
end-user customers that purchased Products during the six (6)
months immediately prior to the termination of this
39
<PAGE>
Agreement; and provided further, that if this Agreement is
terminated pursuant to Section 11.2(g) and Chiron has met its
minimum purchase requirements under this Agreement through the
date of its termination, CVDI shall fulfill such contractual
commitments for a period of twenty-four (24) months. Prices
for Products shall remain at the level of the immediately
prior year adjusted solely for increases/decreases in
material, labor, and reasonable overhead; provided, however,
that if the termination of this Agreement does not relate to
Section 11.2(c) or Section 11.2(d) or Section 11.2(e), any
such price increases shall be limited to increases in the
Producer Price Index over the index for the year prior to any
such termination. Upon termination of this Agreement, and to
the extent permitted under applicable law, in each and every
case for a price paid by CVDI equal to the cost and expense
incurred by Chiron and its Affiliates to obtain such approvals
and registrations, Chiron, upon CVDI's request, shall assign
to CVDI (or such other entities designated by CVDI) all
product approvals, registrations and regulatory approvals to
sell Products in each country in the Territory; or, if
assignment of any such registration or approval is not
permissible under applicable law, where requested by CVDI,
Chiron shall grant CVDI (or its designee) a right of reference
to such registrations and approvals. Chiron shall otherwise
use reasonable efforts to enable CVDI to import and sell the
Products in such countries.
(c) Upon termination of this Agreement by Chiron, CVDI will not
sell cards bearing Chiron marks except to Chiron.
40
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(d) Sections of this Agreement shall survive any termination of
this Agreement which relate to confidentiality and
indemnification, or otherwise which by their nature cannot be
accomplished or fulfilled prior to termination or which relate
to obligations of the parties accrued prior to termination.
11.6 NON-COMPETITION. Chiron shall not, during the term of this
Agreement, manufacture, sell, distribute or cause to be
distributed a competing point of care coagulation product in
the Territory in the Specified Markets.
12. ARBITRATION.
Except for terminations pursuant to Section 11.3 above, all disputes,
controversies and differences which may arise between the parties out of,
in relation to or in connection with this Agreement, or for the breach
thereof, or any claim based on or arising from any alleged wrongful
conduct or omission related to this Agreement, may upon mutual agreement
of the parties, be determined by arbitration. The arbitration shall be
conducted in accordance with the Rules of the American Arbitration
Association ("AAA"), Supplementary Procedures for Large Complex Disputes,
in effect as of the commencement of the arbitration, as modified by the
provisions of this paragraph. The arbitration shall be held in Raleigh,
North Carolina if the arbitration is called for by CVDI and in Boston,
Massachusetts if the arbitration is called for by Chiron. Whenever a party
desires to request arbitration proceedings, such party shall first cause
its chief executive officer or other designated and authorized officer to
contact the other party; which shall cause its chief executive officer or
other designated and authorized officer to make good faith efforts to
resolve any such dispute prior to arbitration or litigation.
41
<PAGE>
No provision of this section shall limit the right of either party to this
Agreement to obtain provisional or ancillary remedies from a court of
competent jurisdiction before, after or during the pendency of any
arbitration if injunctive relief from the court is necessary to prevent
serious and irreparable injury to one party or the other. The parties
acknowledge that for purposes of this Agreement (1) preliminary
injunctions, appointments of receivers, attachments, temporary protective
orders and writs of possession constitute "provisional remedies," and (2)
judicial actions to enforce a decision reached pursuant to this section
constitute "ancillary remedies."
13. MISCELLANEOUS.
13.1 CHOICE OF LAW. This Agreement and all purchase orders issued
hereunder shall be governed and interpreted, and all rights
and obligations of the parties shall be determined, in
accordance with the laws of the State of North Carolina,
without regard to its conflict of laws rules.
13.2 NOTICES. All notices, approvals or other communications
required hereunder shall be in writing and shall be deemed to
have been duly given if delivered personally to such party or
sent to such party by facsimile transmission (confirmed in
writing by other permitted means), air courier or by certified
mail, postage prepaid, to the following addresses:
To Chiron:
Chiron Diagnostics Corporation
63 North Street
Medfield, MA 02052
Attn: Senior Vice President and General Manager Critical Care
Fax: (508) 359-3115
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and with a copy to:
Chiron Diagnostics Corporation
63 North Street
Medfield, MA 02052
Attn: General Counsel
Fax: (508) 359-3885
To CVDI:
Cardiovascular Diagnostics, Inc.
5301 Departure Drive
Raleigh, NC 27604
Attn: President
Fax: (919) 954-9932
and with a copy to:
Larry E. Robbins, Esq.
Wyrick, Robbins, Yates & Ponton, LLP
4101 Lake Boone Trail
Suite 300
Raleigh, NC 27607
Fax (919) 781-4865
or to such other address as the addressee may have specified
in notice duly given to the sender as provided herein. Such notice,
request, demand, waiver, consent, approval or other communications
will be deemed to have been given as of the date so delivered,
transmitted by facsimile or fifteen (15) days after so mailed.
13.3 SEVERABILITY. In the event that any provision of this Agreement
shall be found in any jurisdiction to be in violation of public
policy or illegal or unenforceable in law or equity, such finding
shall in no event invalidate any other provision of this Agreement
in that jurisdiction, and this Agreement shall be deemed amended to
the minimum extent required to comply with the law of such
jurisdiction.
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13.4 ENTIRE AGREEMENT. This Agreement states the entire agreement
between the parties hereto about the transactions contemplated
hereby and may not be amended or modified except by written
instrument duly executed by the parties hereto.
13.5 NO WAIVER. The failure of either party hereto to enforce at any
time, or for any period of time, any provision of this Agreement
shall not be construed as a waiver of such provision or of the
right of such party thereafter to enforce each and every provision.
13.6 ASSIGNMENT, BINDING EFFECT. Neither party shall assign this
Agreement nor any of their respective rights or obligations
hereunder without the prior written consent of the other party,
except that either party may assign this Agreement to any of its
Affiliates or to any person to which substantially all of the
assets comprising its hemostasis products business are transferred
by operation of law or otherwise, including, but without
limitation, by merger or transfer of stock. Any other attempted
assignment without such consent shall be void. Any assignee or
transferee of this Agreement and/or the rights or obligations
hereunder shall expressly assume in writing all obligations of the
assignor/transferor pursuant to this Agreement. In performing this
Agreement, Chiron may, upon sixty (60) days advance written notice,
delegate to its Affiliates its obligations hereunder. Chiron
Diagnostics shall remain primarily liable to CVDI despite such
delegation.
13.7 INDEPENDENT CONTRACTOR. Each party shall act as the independent
contractor of the other party. Neither party shall be the legal
agent of the other for any purpose whatsoever and therefore has no
right or authority to make or underwrite any promise, warranty or
representation, to execute any contract or otherwise to assume any
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<PAGE>
obligation or responsibility in the name of or in behalf of the
other party, except to the extent specifically authorized in
writing by the other party. Neither of the parties hereto shall be
bound by or liable to any third persons for any act or for any
obligation or debt incurred by the other toward such third party,
except to the extent specifically agreed to in writing by the party
so to be bound.
13.8 HEADINGS. All section headings contained in this Agreement are for
convenience of reference only, do not form a part of this Agreement
and shall not affect in any way the meaning or interpretation of
this Agreement.
13.9 COUNTERPARTS. This Agreement may be executed in any number of
counterparts and any party hereto may execute any such counterpart,
each of which when executed and delivered shall be deemed to be an
original and all of which counterparts taken together shall
constitute but one and the same instrument. It shall not be
necessary in making proof of this Agreement or any counterpart
hereof to account for any of the other counterpart.
13.10 FORCE MAJEURE. Neither party shall be deemed to be in default for
failure or delay in performance to the extent of causes which are
reasonably unforeseeable or, if foreseeable, reasonably unremediable
in spite of diligent efforts to effect a reasonable remedy, and
which are caused by act or omission of any governmental authority or
of the other party, compliance with new governmental regulations,
insurrection, riot, embargo, delays or shortages in transportation
or inability to obtain necessary materials, and Acts of God or
Nature.
45
<PAGE>
13.11 INSURANCE. CVDI and Chiron shall at all times maintain insurance,
including product liability insurance, in the amount of
$5,000,000.00. Each party shall, at the request of the other party,
provide such evidence of such insurance as requested, including a
certificate of insurance. Such insurance shall not be canceled
without at least thirty (30) days prior written notice to Chiron.
13.12 BOOKS AND RECORDS. CVDI and Chiron shall, during the term of this
Agreement and for three (3) years thereafter, make and keep full and
accurate books and records showing the quantities of Products sold
in sufficient detail to determine applicable pricing pursuant to
Section 7.3 and applicable Card, commission, and Instrument credits
pursuant to Sections 3.6, 5.6, 5.7, and 7.2. Each party shall be
permitted to designate an independent third party such as a
nationally recognized accounting firm to inspect the applicable
books and records of the other party from time to time, during
regular business hours to the extent necessary to verify applicable
pricing and credits. The designated party shall report its findings
to the requesting party. Each party agrees to treat as Proprietary
Information all information learned in the course of any such
inspection hereunder, except when it is necessary for the party to
reveal such information in order to enforce its rights under this
Agreement. Notwithstanding anything to the contrary contained
herein, the party to be inspected may waive at any time the
requirement contained in this section relating to the use of an
independent third party.
13.13 PRESS RELEASES; PUBLICITY. Neither party shall publicly disclose or
announce any term of this Agreement; provided, however, that a party
may issue a press release disclosing
46
<PAGE>
the existence of this Agreement and other terms only upon prior
written agreement of the other party, further provided, that each
party shall at all times be entitled to make disclosures required
by applicable securities laws.
[The next page is the signature page.]
47
<PAGE>
IN WITNESS WHEREOF, this Agreement has been duly executed and delivered as
of the day and year first above written.
CARDIOVASCULAR
DIAGNOSTICS, INC. CHIRON DIAGNOSTICS CORPORATION
By____________________________ By:__________________________________
As its As its
48
<PAGE>
SCHEDULE 1.13
TERRITORY
EUROPE OR EUROPE
MANAGED BY EUROPE (CON'T) AMERICAS ASIA
Albania* Lithuania* Argentina* Australia
Angola* Malta* Bahamas* China (JV)
Austria Moldova* Bermuda* Hong Kong
Bahrain* Netherlands Bolivia* India*
Belgium Niger* Brazil Indonesia*
Belgium Nigeria* Canada** Malaysia*
Bulgaria* Norway Caribbean Islands* New Zealand*
Cyprus* Oman* (except for Cuba) Pakistan*
Czech Republic Poland Chile* Philippines*
Denmark Portugal Columbia* Singapore*
Egypt* Qatar* Costa Rica* Thailand
Ethiopia* Romania* Dominican
Finland Russia Republic*
France Saudi Arabia Ecuador*
Gambia* Slovakia* El Salvador*
Germany South Africa* Mexico
Ghana* Spain Nicaragua*
Gibraltar* Sudan* Panama*
Greece* Sweden Paraguay*
Hungary* Switzerland Peru*
Iceland* Syria* Puerto Rico*
Iran* Tanzania* United States**
Iraq* Turkey Uruguay
Ireland Uganda* Venezuela*
Israel* Ukraine*
Italy United Arab
Jordan* Emirates*
Kenya* United Kingdom
Kuwait* Yemen*
Latvia* Zambia*
Lebanon* Zimbabwe*
* Distributor Countries
** Chiron has no distribution rights with respect to Canada and the United
States for Specialty Products
<PAGE>
Schedule 2.5
STANDARD TERMS AND CONDITIONS OF SALE
I. DEFINITIONS
CVDI: Cardiovascular Diagnostics, Inc. The person or
organization that has placed an Order with CVDI or with
whom CVDI has concluded an agreement.
Standard Terms: These Standard Terms and Conditions of Sale.
Products: The whole of the Products the subject of this
Contract, as specified in the Offer or in the Order.
Offer: The written proposition, made by CVDI, which
includes these Standard Terms, a specification of the
Products and the current price.
Order: The written request, made by the Buyer,
including a specification of the Products to be ordered.
II. OFFERS, GOODS, AND SPECIFICATIONS
1. All offers, Orders and Contracts of Sale by CVDI shall be
subject to these Standard Terms
2. These standard Terms can only be amended with the specific
written consent of CVDI.
III. ORDERS
1. No Order shall be binding on CVDI until expressly accepted by
CVDI in writing.
2. No Order may be cancelled and/o amended by the Buyer except
with the written consent of CVDI.
3. Subject to the terms and conditions contained in the
distribution agreement between CVDI and Chiron, which shall
govern and be superior to these Standard Terms and Conditions
of Sale, and subject to any special terms agreed upon in
writing between CVDI and Chiron, these Standard Terms and
Conditions of Sale represent the Understanding between the
parties and shall supersede and exclude any previous
agreements between CVDI and the Buyer in relation to their
subject matter and all terms and/or General Conditions of
whatever nature which the Buyer may in any way seek to impose.
Schedule 2.5-1
<PAGE>
IV. PRICES
1. Unless otherwise agreed upon, all prices mentioned in CVDI
current standard price list are based on delivery FOE, CVDI.
2. The price shall be exclusive of, and the Buyer shall pay, all
duties or taxes arising in connection with the sale unless
otherwise agreed to by CVDI in writing.
V. PAYMENT
1. Subject to any agreement to the contrary, payment must be made
within 30 days from the date of the invoice.
2. If the Buyer commits any breach of this Contract, all monies
accrued and owing under this Contract shall immediately become
due and payable.
3. In the event of any late payment, the Buyer shall pay CVDI
interest from the date payment became due, to be calculated at
the Wall Street Journal Prime Rate increased by 5% per month.
4. All payments shall be made in full without deducting any right
of equity, set-off or counterclaim.
VI. CARRIAGE AND DELIVERY
1. Unless otherwise agreed upon, delivery of the Products shall
be FOB, CVDI.
2. Any delivery time specified by the Buyer or indicated by CVDI
is an estimate only and CVDI shall not have any liability
whatsoever for failure to deliver the Products at or within
any such delivery time. In case of any late deliver, CVDI must
be formally declare to be in default and must be granted a
reasonable term to comply with its delivery obligation.
3. If the Buyer refuses to take prompt deliver or is negligent in
providing necessary information or instructions in accordance
with these Standard Terms, then the Products shall be stored
at the Buyers risk. The Buyer shall pay CVDI all additional
deliver, storage and insurance costs and any other costs
incurred along with any loss arising in connection with this
neglect or refusal.
4. The Buyer shall inspect all Products promptly upon receipt
thereof. Such inspection shall include, without limitation, a
quality control analysis. Any
Schedule 2.5-2
<PAGE>
Product not properly rejected within 4 weeks after receipt by
the Buyer shall be deemed accepted. The Buyer shall be deemed
to have received the correct quantity of the Products upon
CVDI's delivery note being signed on behalf of the Buyer or by
its carrier. In the event of an incomplete or excessive
delivery, the Buyer shall not be entitled to reject the
Products included in the Contract or to treat the Contract as
repudiated.
5. They Buyer shall notify CVDI in writing within 5 days from the
moment of discovery of any other defect or within 5 days from
the moment the defect should have been discovered. Save only
as provided under these General Conditions, CVDI shall not be
held liable for any defect which is not so notified. Unless
expressly agreed otherwise, the risk of loss ensuing from
loading and transporting the Products shall be borne by the
Buyer even if the transport is handled by CVDI at the Buyer's
request.
VII. RETENTION OF TITLE.
1. Notwithstanding delivery, title to the Products shall remain
in CVDI and shall not pass to the Buyer until CVDI has
received payment in full with respect to all Products
delivered or to be delivered, work done in relation to sales
agreements, interest owed and/or accrued including any cost
which may arise in respect of letters of credit, bills of
exchange or cheques along with any storage and other costs,
resulting from a breach of the sales agreement by the Buyer.
VIII. INTELLECTUAL PROPERTY RIGHTS.
1. All patents, designs, trademarks, copyrights and other
industrial or intellectual property rights of CVDI of whatever
nature in respect of the Products, any of their constituent
parts, their packaging or other material supplied with the
Products shall remain the absolute property of CVDI and shall
remain vested in CVDI.
2. The Buyer shall indemnify CVDI against any and all loss,
damage, claims, costs, and expenses suffered or incurred by
CVDI in connection with any material, information or
instruction supplied by the Buyer in relation to the Products,
including the industrial or intellectual property rights as
stated in Article VIII.1.
IX. LIABILITY.
1. CVDI's liabilities regarding the Products shall be limited in
accordance with the provisions of CVDI's Standard Limited
Warranty attached hereto as Exhibit A and incorporated by this
reference. CVDI does not give any warranty beyond these
specifications.
Schedule 2.5-3
<PAGE>
2. CVDI's aggregate liability to the Buyer in respect of any and
all causes of action arising at any time in connection with
the Products, including but not limited to action in relation
to negligence, shall be limited to the amount paid the Buyer
for the Products or replacement of the Product at CVDI's
option. In no event shall CVDI be liable for costs of
procurement of substitute goods by anyone. In no event shall
CVDI be liable for any special, consequential, incidental, or
indirect damages, including but not limited to damages
resulting from late delivery and loss of profit.
X. ALTERATIONS TO THE PRODUCTS AND DESCRIPTION.
1. After delivery of the Products, the Buyer shall not alter the
Products or alter any marks, designs or artwork on the
Products or on the packaging. The Buyer shall not apply its
own marks on the Products or on their packaging, and shall not
cause, allow or permit any third party to do so.
XI. DEFAULT.
1. If any of the following events occur, all monies accrued and
owing under the Contract shall become immediately due and
payable and CVDI shall be entitled at any time thereafter to
terminate the Contract and any other Contract between CVDI and
the Buyer by written notice, or to suspend further deliveries
of Products, without prejudice to its right to full
indemnification:
- - if the Buyer defaults or commits a breach of the Contract or
of any other obligations to CVDI and if, in CVDI's reasonable
judgement, termination of the contract or suspension of
further deliveries is justified;
- - if an attachment or execution is levied upon the Buyer's
property and/or assets;
- - if the Buyer makes, offers or proposes a settlement,
arrangement or composition with its creditors. If a resolution
or petition to wind up the Buyer's business is passed or
presented, if a petition for an administrative order in
respect of the Buyer is presented, if a petition for a
bankruptcy order is made against the Buyer, or if a receiver,
liquidator, trustee or manager of the Buyer's undertaking,
property, assets or any part thereof is appointed;
- - If CVDI considers that the Buyer may be unable to provide
payment in full and/or to perform any of its other obligations
under the Contract, and the Buyer is (in CVDI's reasonable
judgement) not able to provide security covering his
obligation.
Schedule 2.5-4
<PAGE>
2. Should the Buyer fail to fulfill one or more of his
obligations, all reasonable costs incurred in and out of court
in order to realize fulfillment will be at his expense. Such
costs will in any event include those for collecting agencies,
bailiffs and attorneys.
XII. FORCE MAJEURE.
1. CVDI shall not be liable, if it is prevented from or hindered
or delayed in performing any of its obligations by reason of
force majeure. Force majeure shall consist of, but shall not
be limited to, the following:
- - strike, lock-out or trade dispute (in each case whether
involving CVDI's or a third party's employees);
- - non-availability, interruption, failure of or delay in CVDI's
usual supply sources, manufacturing facilities, transportation
routes or facilities;
- - breakdown of machinery or power failure;
- - default or delay by CVDI's sub-Contractors, acts of national
or local government or other authorities;
- - storm, tempest, fire, flood, explosion, accident, theft, civil
disturbance, insurrection or war.
XIII. GOVERNING LAW.
1. These Standard Terms and any Contract in conjunction therewith
shall be governed by the laws of the State of North Carolina.
2. In any proceeding instigated by the Buyer in respect of any
matter which may arise in connection with the contract or
these Standard Terms, the courts of North Carolina shall have
exclusive jurisdiction. In any such proceedings brought by
CVDI, CVDI shall be at liberty to bring the proceeding before
the courts of North Carolina or any other court which would
have jurisdiction in the absence of this clause.
Schedule 2.5-5
<PAGE>
Schedule 3.4
CVDI TRADEMARKS
TAS(R)
PT-ONE(R)
PTNC(TM)
LHMT(TM)
EQC(TM)
TAS ACCENT(TM)
ECT(TM)
HMT(TM)
HTT(TM)
PRT(TM)
CHIRON TRADEMARKS
To Be Supplied By Chiron
Schedule 3.4 - 1
<PAGE>
SCHEDULE 3.6
SERVICE AND MAINTENANCE
Service Fee $[ ] (includes 1st hour of
labor)
plus Each additional hour of labor [ ]
plus QA Testing [ ]
plus Handling Fee [ ]
plus Cost of any replacement parts $$$
plus All related shipping charges, $$$ (minimum shipping charge for
if not shipped against all international shipments
customer's shipping account is $225.000 per analyzer
(UPS or FEDEX) which includes freight
charges as well as any
related import duties and
taxes)
Note 1: Minimum charge for a TAS repair is $[ ].
Note 2: TAX repairs usually take approximately 2 hours to assess the
problem and service the analyzer.
Note 3: Any necessary part replacements will be communicated to the customer
prior to any repair service and will only be performed after obtaining
customer authorization.
- ------------------
[ ] CONFIDENTIAL TREATMENT REQUESTED; CERTAIN INFORMATION OMITTED AND
FILED SEPARATELY WITH THE SEC.
Schedule 3.6 - 1
<PAGE>
SCHEDULE 6.1
INFRINGEMENT
See materials regarding Litigation with Boehringer Mannheim Corporation
previously provided by Chiron.
Schedule 6.1 - 1
<PAGE>
Schedule 7.1
PRICING
INITIAL SALES PRICE
PRODUCTS CATALOG # TO CHIRON
- --------------------------------------------------------------------------------
Controls $ [ ] each
Service Contracts $ [ ] each
$ [ ] per
Sample Card
- ------------------
[ ] CONFIDENTIAL TREATMENT REQUESTED; CERTAIN INFORMATION OMITTED AND
FILED SEPARATELY WITH THE SEC.
Schedule 7.1 - 1
<PAGE>
EXHIBIT A
CVDI STANDARD LIMITED WARRANTY
Cardiovascular Diagnostics, Inc. ("CVDI") provides a 12 month warranty on
new TAS Analyzers from the time of delivery to the end-year. Any instrument
covered under warranty will be replace within 10 working days of notification to
CVDI's technical services department. Upon receiving the replacement unit, the
customer shall return the defective unit to CVDI via air freight at CVDI's
expense.
This warranty cover the TAS Analyzer's shelf life under normal conditions
and is contingent upon proper use of a TAS Analyzer in the application for which
such product was intended and does not cover products which were modified
without CVDI's approval, which have expired, which were subjected to unusual
physical, chemical or electrical stress or temperature fluctuations, or which
were not stored in accordance with the specifications provided by CVDI.
EXCEPT FOR THIS EXPRESS LIMITED WARRANTY, CVDI GRANTS NO WARRANTIES FOR
THE PRODUCTS, EXPRESS OR IMPLIED, EITHER IN FACT OR BY OPERATION OF LAW, BY
STATUTE OR OTHERWISE, TO DISTRIBUTOR, ITS CUSTOMERS OR ANY OTHER PARTY, AND CVDI
SPECIFICALLY DISCLAIMS ANY IMPLIED WARRANTY OF QUALITY, WARRANTY OF
MERCHANTABILITY, WARRANTY OF FITNESS FOR A PARTICULAR PURPOSE OR WARRANTY OF
NONINFRINGEMENT.
CVDI'S LIABILITY ARISING OUT OF THIS WARRANTY SHALL BE LIMITED TO THE
AMOUNT PAID BY THE CUSTOMER FOR THE PRODUCTS OR REPLACEMENT
Exhibit A - 1
<PAGE>
OF THE PRODUCTS, AT CVDI'S OPTION. IN NO EVENT SHALL CVDI BE LIABLE FOR COSTS OF
PROCUREMENT OF SUBSTITUTE GOODS BY ANYONE. IN NO EVENT SHALL CVDI BE LIABLE OF
ANY SPECIAL, CONSEQUENTIAL, INCIDENTAL, OR INDIRECT DAMAGES, HOWEVER CAUSED, ON
ANY THEORY OF LIABILITY, WHETHER OR NOT CVDI HAS BEEN ADVISED ON THE POSSIBILITY
OF SUCH DAMAGE.
Exhibit A - 2
Exhibit 10.23
COMMON STOCK PURCHASE AGREEMENT
This Common Stock Purchase Agreement (the "Agreement") is made as of
August 28, 1998, between Cardiovascular Diagnostics, Inc., a North Carolina
corporation (the "Company"), and Chiron Diagnostics Corporation, a Delaware
corporation (the "Purchaser").
Section 1 Authorization and Sale of Common Stock
1.1 Authorization. The Company has authorized the sale and issuance to
Purchaser of up to 600,000 shares of its Common Stock, $.001 par value per share
(the "Common Stock").
1.2 Sale of Common Stock. Subject to the terms and conditions hereof, the
Company will issue and sell to the Purchaser and the Purchaser will buy from the
Company 600,000 shares of Common Stock (the "Shares") at a per share purchase
price of $10.00 (the "Purchase Price Per Share"), for an aggregate purchase
price of $6,000,000.
Section 2 Closing Date; Delivery
2.1 Closing Date. The Closing of the purchase and sale of the Shares
hereunder (the "Closing") shall be held at the offices of Wyrick Robbins Yates &
Ponton LLP, 4101 Lake Boone Trail, Suite 300, Raleigh, North Carolina, at 3:00
p.m. on August 28, 1998, or at such other time, date and place upon which the
Company and the Purchaser shall mutually agree (the date of the Closing is
hereinafter referred to as the "Closing Date").
2.2 Delivery. At the Closing, the Company will deliver to the Purchaser a
certificate or certificates representing the Shares against payment of the
purchase price therefor by wire transfer of immediately available funds or by
certified or cashier's check drawn on a United States bank, payable to the
Company in the amount of the applicable purchase price. The certificate or
certificates shall be subject to a legend restricting transfer under the
Securities Act of 1933, as amended (the "Securities Act"), and referring to
restrictions on transfer and rights of first refusal herein, such legend to be
substantially as follows:
The shares represented by this certificate have been acquired for
investment and have not been registered under the Securities Act of 1933,
as amended. Such shares may not be sold or transferred in the absence of
such registration or an opinion of counsel satisfactory to the Company as
to the availability of an exemption from registration.
The shares represented by this certificate are subject to restrictions on
transfer, including any sale, pledge or other hypothecation, set forth in
an agreement between the Company and Chiron Diagnostics Corporation, a
copy of which agreement may be obtained at no cost by written request made
by the holder of
<PAGE>
record of this certificate to the Secretary of the Company at the
Company's principal executive offices.
Section 3 Representations and Warranties of the Company
Except as set forth on the Schedule of Exceptions attached hereto as
Exhibit A, the Company hereby represents and warrants to the Purchaser as
follows:
3.1 Organization. The Company is a corporation duly organized and validly
existing under the laws of the State of North Carolina and is in good standing
under such laws. The Company has requisite corporate power and authority to own,
lease and operate its properties and assets, and to carry on its business as
presently conducted and as proposed to be conducted. The Company is qualified to
do business as a foreign corporation in each jurisdiction in which the ownership
of its property or the nature of its business requires such qualification,
except where failure to so qualify would not have a material adverse effect on
the Company. The Company has furnished to the Purchaser true and correct copies
of its Articles of Incorporation and Bylaws as amended and will furnish upon
request to the Purchaser true and correct copies of any amendments thereto
through the term of this Agreement. The Company has one subsidiary, Coeur
Laboratories, Inc., which is wholly-owned by the Company. References in Section
3 to the Company shall be deemed to include, where appropriate, and to be given
separately with respect to, the Company and its subsidiary.
3.2 Capitalization. The authorized capital stock of the Company consists
of 10,000,000 shares of Common Stock, $.001 par value per share, of which
6,793,079 shares were issued and outstanding as of May 1, 1998 and 1,000,000
shares of Preferred Stock, $.001 par value per share, no shares of which are
issued and outstanding. All such issued and outstanding shares have been duly
authorized and validly issued and are fully paid and non-assessable. The Company
has reserved an additional 1,010,710 shares of its Common Stock for issuance to
employees, officers, directors and consultants to the Company as may be
determined by the Company's Board of Directors from time to time pursuant to its
stock option plans, of which 878,190 shares were subject to outstanding options
as of December 31, 1997. Except as set forth in the Company's materials filed
with the Securities and Exchange Commission, ("SEC") or as provided or described
in this Agreement, there are no other options, warrants, conversion privileges
or other contractual rights presently outstanding to purchase or otherwise
acquire any authorized but unissued shares of the Company's capital stock or
other securities.
3.3 Authorization. The Company has all corporate right, power and
authority to enter into this Agreement and to consummate the transactions
contemplated hereby and thereby. All corporate action on the part of the
Company, its directors and shareholders necessary for the authorization,
execution, delivery and performance of this Agreement by the Company, the
authorization, sale, issuance and delivery of shares of Common Stock
contemplated hereby, and the performance of the Company's obligations hereunder
has been taken. This Agreement has been duly executed and delivered by the
Company and constitutes a legal, valid and binding obligation of the Company,
enforceable against the Company in
2
<PAGE>
accordance with its terms, subject to laws of general application relating to
bankruptcy, insolvency and the relief of debtors and rules of law governing
specific performance, injunctive relief or other equitable remedies, and to
limitations of public policy. Upon the issuance and delivery of the Shares as
contemplated by this Agreement, the Shares will be validly issued, fully paid
and nonassessable. Except as provided or described herein, the issuance and sale
of the Shares contemplated hereby will not give rise to any preemptive rights or
rights of first refusal in existence on the date hereof on behalf of any person.
3.4 No Conflict. Subject to compliance with such filings as may be
required to be made with the SEC, the National Association of Securities
Dealers, Inc. ("NASD") and the North Carolina Secretary of State, the execution
and delivery of this Agreement does not, and the consummation of the
transactions contemplated hereby will not result in any violation of, or default
(with or without notice of lapse of time, or both), or give rise to a right of
termination, cancellation or acceleration of any material obligation or to a
loss of a material benefit, under, any provision of the Certificate of
Incorporation or Bylaws of the Company or any mortgage, indenture, lease or
other agreement or instrument, license, judgment, order, decree, statute, law,
ordinance, rule or regulation applicable to the Company, its properties or
assets, the effect of which would have a material adverse effect on the Company
or materially impair or restrict its power to perform its obligations as
contemplated hereby.
3.5 Accuracy of Reports. All reports required to be filed by the Company
within the year prior to the date of this Agreement under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), have been duly filed,
were in substantial compliance with the requirements of their respective forms,
were complete and correct in all material respects as of the dates at which the
information was furnished, and contained (as of such dates) no untrue statement
of a material fact or omitted to state a material fact necessary in order to
make the statements made therein, in light of the circumstances under which they
were made, not misleading.
3.6 Governmental Consents, etc. No consent, approval or authorization of
or designation, declaration or filing with any governmental authority on the
part of the Company is required in connection with the execution and delivery of
this Agreement, the offer, sale or issuance of the Shares, or the consummation
of any other transaction contemplated hereby, except such filings as may be
required to be made with the SEC, the NASD and the North Carolina Secretary of
State.
3.7 Litigation. Except as set forth in the Company's reports filed with
the SEC, there is no pending or, to the best of the Company's knowledge,
threatened lawsuit, administrative proceeding, arbitration, labor dispute or
governmental investigation ("Litigation") affecting the Company or by which any
material portion of its assets taken as a whole may be bound, and which
Litigation if adversely determined would have a material adverse effect on the
Company.
3.8 Intellectual Property. The Company owns or has a valid right to use
the Intellectual Property Rights being used to conduct its business as now
operated and as now
3
<PAGE>
proposed to be operated. The conduct of its business as now operated and as now
proposed to be operated does not materially conflict with or infringe upon the
intellectual property rights of others. No claim is pending or threatened
against the Company and/or its officers, employees and consultants to the effect
that any such Intellectual Property Right owned or licensed by the Company, or
which the Company otherwise has the right to use, is invalid or unenforceable by
the Company. The Company is the exclusive owner of all right, title and interest
in its material Intellectual Property Rights as purported to be owned by the
Company, and such Intellectual Property Rights are valid and in full force and
effect. Neither the Company, nor any of its employees or consultants has
received notice of, and to the best of the Company's knowledge after reasonable
investigation, there are no claims that the Company's Intellectual Property
Rights or the use or ownership thereof by the Company infringes, violates or
conflicts with any such right of any third party.
For purposes of this Agreement, "Intellectual Property" means any and all,
whether domestic or foreign, patents, patent applications, patent rights, trade
secrets, confidential business information, formulae, processes, copyrights,
software methodologies, claims of infringement against third parties, licenses,
permits, license rights, contract rights with employees, consultants and third
parties, joint venture rights or rights under any contract or agreement
involving the license or transfer of technology (whether to or from the Company
with third parties), trademarks, trademark rights, inventions and discoveries,
and other such rights generally classified as intangible, intellectual property
assets in accordance with generally accepted accounting principles.
Notwithstanding anything to the contrary, each representation and warranty
contained in this Section 3.8 is modified in its entirety by any information set
forth in the Company's reports filed with the SEC, and by any information
contained in the Boehringer Mannheim Corporation litigation materials previously
furnished to the Purchaser.
3.9 Environmental Liability.
(a) Environmental Substance Liability. No event has occurred or
condition exists or operating practice is being employed that could give
rise to material liability on the part of the Company under any presently
enacted federal, state, or local statute, or any regulation that has been
promulgated pursuant thereto, or common law, as a result of or in
connection with, the following:
(i) the handling, storage, use, transportation or disposal of any
Substances (as hereinafter defined) in or near or from
facilities, by the Company; or
(ii) any intentional or unintentional emission, discharge or
release of any Substances in, from or near facilities of the
Company into or upon the air, surface water, ground water or
land.
As used in this Agreement, the term Substances shall mean any
pollutant, hazardous substance, hazardous material, hazardous waste
or toxic waste, as
4
<PAGE>
defined in any presently enacted federal, state or local statute or any
regulation that has been promulgated pursuant thereto.
(b) Environmental Permits. The Company has obtained and is in
material compliance with all registrations, permits, licenses, and
approvals issued by or on behalf of any federal, state or local government
body or agency ("Environmental Permits"), that are required in connection
with the discharge or emission of Substances (as hereinabove defined) from
the facilities used or owned by the Company or the generation, treatment,
storage, transportation, or disposal of any such Substances. Such
Environmental Permits are currently effective and sufficient for the
ownership and operation of the facilities and the operations of the
Company as currently conducted.
Notwithstanding anything to the contrary, each representation and
warranty contained in this Section 3.9 is modified in its entirety by any
information set forth in the Company's reports filed with the SEC.
3.10 Disclosure. All disclosures made in this Agreement are modified by
any information set forth in the Company's reports filed with the SEC subject to
such modifications, no representation or warranty of the Company contained in
this Agreement contains any untrue statement of a material fact or omits to
state a material fact necessary in order to make the statements contained herein
or therein, in light of the circumstances under which they were made, not
misleading.
Section 4 Representations and Warranties of the Purchaser
The Purchaser hereby represents and warrants to the Company as follows:
4.1 Investment. It will acquire the Shares and any other shares purchased
from the Company pursuant to this Agreement for investment for its own account,
not as a nominee or agent, and not with a view to, or for resale in connection
with, any distribution thereof. It understands that the Shares and any other
shares purchased by the Purchaser from the Company pursuant to this Agreement
have not been, and will not be, registered under the Securities Act by reason of
a specific exemption from the registration provisions of the Securities Act
which depends upon, among other things, the bona fide nature of Purchaser's
investment intent and the accuracy of the Purchaser's representations as
expressed herein. By reason of its business or financial experience or the
business or financial experience of its professional advisors who are
unaffiliated with and who are not compensated by the Company or any affiliate or
selling agent of the Company, it directly or indirectly, could be reasonably
assumed to have the capacity to protect its own interest in connection with the
purchase of the Shares from the Company at the Closing.
4.2 Organization. The Purchaser is a corporation duly organized and
validly existing in good standing under the laws of the State of Delaware, with
all requisite corporate power and authority to own, lease and operate its
properties and assets and to carry on its business as presently conducted and as
proposed to be conducted.
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4.3 Authority. The Purchaser has all corporate right, power and authority
to enter into this Agreement and to consummate the transactions contemplated
hereby. The execution and delivery of this Agreement by the Purchaser and the
consummation by the Purchaser of the transactions contemplated hereby have been
duly authorized by all necessary corporate action on behalf of the Purchaser.
This Agreement has been duly executed and delivered by the Purchaser and
constitutes a legal, valid and binding obligation of the Purchaser, enforceable
against the Purchaser in accordance with its terms, subject to laws of general
application relating to bankruptcy, insolvency and the relief of debtors and
rules of law governing specific performance, injunctive relief or other
equitable remedies, and to limitations of public policy. Subject to compliance
with such filings as may be required to be made with the SEC and the NASD, the
execution and delivery of this Agreement do not, and the consummation of the
transactions contemplated hereby will not, conflict with or result in any
violation of any obligation under any provision of the Articles of Incorporation
or Bylaws of the Purchaser or any mortgage, indenture, lease or other agreement
or instrument, license, judgment, order, decree, statute, law, ordinance, rule
or regulation applicable to the Purchaser.
4.4 Government Consents, etc. No consent, approval or authorization of or
designation, declaration or filing with any governmental authority on the part
of the Purchaser is required in connection with the valid execution and delivery
of this Agreement, the purchase of the Shares, or the consummation of any other
transaction contemplated hereby, except (a) such filings as may be required to
be made with the SEC and the NASD and (b) the filing of such forms with the
United States Department of Justice and the Federal Trade Commission as may be
required under the HSR Act, and the expiration of any waiting periods
thereunder.
4.5 Investigation. The Purchaser has had a reasonable opportunity to
discuss the Company's business, management and financial affairs with the
Company's management and the Purchaser has received satisfactory responses from
management of the Company to the Purchaser's inquiries.
Section 5 Conditions to Obligations of Purchaser
5.1 Conditions to Obligations of Purchaser. The Purchaser's obligation to
purchase the Shares at the Closing is, at the option of the Purchaser, which may
waive any such conditions to the extent permitted by law, subject to the
fulfillment on or prior to the Closing Date of the following conditions:
(a) Representations and Warranties Correct. The representations and
warranties made by the Company in Section 3 hereof shall be true and
correct when made, and shall be true and correct on the Closing Date with
the same force and effect as if they had been made on and as of said date.
(b) Covenants. All covenants, agreements and conditions contained in
this Agreement to be performed by the Company on or prior to such purchase
shall have been performed or complied with in all material respects.
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(c) No Order Pending. There shall not then be in effect any order
enjoining or restraining the transactions contemplated by this Agreement.
(d) No Law Prohibiting or Restricting Such Sale. There shall not be
in effect any law, rule or regulation prohibiting or restricting such sale
or requiring any consent or approval of any person which shall not have
been obtained to issue the Shares (except as otherwise provided in this
Agreement).
Section 6 Conditions to Obligations of Company
6.1 Conditions to Obligations of Company. The Company's obligation to sell
and issue the Shares at the Closing is, at the option of the Company, which may
waive any such conditions to the extent permitted by law, subject to the
fulfillment on or prior to the Closing Date of the following conditions:
(a) Representations and Warranties Correct. The representations and
warranties made by the Purchaser in Section 4 hereof shall be true and
correct when made, and shall be true and correct on the Closing Date with
the same force and effect as if they had been made on and as of said date.
(b) Covenants. All covenants, agreements and conditions contained in
this Agreement to be performed by the Purchaser on or prior to the Closing
Date shall have been performed or complied with in all material respects.
(c) No Order Pending. There shall not then be in effect any order
enjoining or restraining the transactions contemplated by this Agreement.
(d) No Law Prohibiting or Restricting Such Sale. There shall not be
in effect any law, rule or regulation prohibiting or restricting such sale
or requiring any consent or approval of any person which shall not have
been obtained to issue the Shares (except as otherwise provided in this
Agreement).
Section 7 Covenants of the Company
Until the termination of this Agreement in accordance with Section 11.1
hereof or of the particular covenant, as the case may be:
7.1 No Objection. Provided the Purchaser is in compliance with and has
performed all covenants, agreements and conditions contained in this Agreement
to be performed by the Purchaser, the Company shall not interpose any objection
or take any legal action as a plaintiff in connection with the acquisition by
the Purchaser of such number of shares of Common Stock as is permitted to be
owned by the Purchaser pursuant to this Agreement.
7.2 Sale of Shares. The Company shall take such action as is reasonably
necessary, subject to compliance with applicable law, to issue and sell the
Shares to the Purchaser.
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7.3 Board of Directors. The Company shall be obligated to include in the
slate of nominees recommended by the Company's Board of Directors or management
to shareholders, for election as directors at the Company's next meeting of
shareholders, one person designated by the Purchaser and reasonably acceptable
to Company, in its sole discretion.
7.4 Change in Control. In the event of a "change in control" of the
Company through merger or consolidation (where the Company is not the surviving
entity) or sale of all or substantially all of the Company's assets (in any such
event, a "Change in Control"), if the price per share to be paid to shareholders
of the Company in connection with the Change in Control (the "Change in Control
Price Per Share") is less than the Purchase Price Per Share and the Purchaser is
not in default under and has met its minimum purchase requirements for all
Products under that certain Distribution Agreement dated August 28, 1998 between
the Company and the Purchaser through the date of the Change in Control, then
the Company shall be obligated to pay the Purchaser, for each Share purchased
hereunder that the Purchaser then holds, an amount equal to the Purchase Price
Per Share minus the Change in Control Price Per Share, such amount to be paid to
the Purchaser in addition to the Change in Control Price Per Share to be
received in connection with the Change in Control.
7.5 Change of Control Transactions. In the event that the Company
commences negotiations with respect to, or otherwise obtains knowledge of, a
potential transaction that would involve a change of control of the Company, it
will promptly notify Purchaser and will provide Purchaser with an opportunity to
propose a change of control transaction in which the Purchaser or an affiliate
thereof would be the acquiring company and, in connection therewith will provide
Purchaser with all information and equivalent access to the management and Board
of Directors (including any committee of the Board of Directors which may be
formed to consider which a transaction) as is made available to any other
proposed acquiring person.
Notwithstanding anything to the contrary contained in this Section 7.5,
the Company shall have no obligations under this Section 7.5 to the extent that
the Board of Directors, in the exercise of its business judgment, determines
that the obligations set forth in this Section 7.5 are not in the best interests
of the Company or the shareholders of the Company. The obligations contained in
this Section 7.5 shall terminate simultaneously with the termination of the
distribution agreement between Company and Purchaser of even date herewith.
7.6 Registration Rights.
(a) Demand Registration Rights. At any time on or after the date hereof,
but not more than twice, the Purchaser, provided the registration rights
hereunder with respect to the Purchaser's Shares (which, for purposes of this
Section 7.6, means (A) the Shares, (B) any shares of Common Stock acquired or
permitted to be acquired pursuant to this Agreement and (C) any shares of Common
Stock issued as (or issuable upon the conversion of any warrant, right or other
security which is issued as) a dividend or other distribution with respect to or
in replacement of the Common Stock described in clauses (A) and (B) above) have
not lapsed as set forth in Section 7.6(i) hereof, may demand in writing that the
Company effect a registration under the Securities Act of all or any portion
(but not less than Shares with an
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aggregate fair market value of $1,000,000), of the Shares for the purpose of
sale in the manner specified in such demand. Such demand shall also specify the
number of Shares that the Purchaser wishes to have so registered. The Company
shall, within 10 days of receipt of such demand, give written notice of such
demand to all other holders of the Company's securities with contractual rights
to have such securities registered under the Securities Act. Any such holder
may, within 30 days of its receipt of such notice from the Company, give a
written notice (the "Inclusion Notice") to the Company specifying the number of
the Company's securities which such holder wishes to include in such
registration. The Company shall prepare and file a registration statement on any
available form of registration statement, for the public sale of the Shares and
any other securities that are identified in and in accordance with the demand
and all Inclusion Notices (such Shares and any other securities to be included
in the registration are referred to collectively as the "Registrable
Securities") as soon as practicable; provided, however, that if the Company
shall furnish to the holders of Registrable Securities (including the Purchaser,
the "Participating Holders") a certificate signed by the Chairman or President
of the Company stating that in the good faith judgment of the Board of Directors
of the Company, it would be seriously detrimental to the Company for a
registration statement to be filed, then the Company's obligation to file a
registration statement shall be deferred for a reasonable period not to exceed
180 days from the date of such request. Upon written notice from the Company to
the Participating Holders delivered within 30 days of a demand to register
Registrable Securities under this Section 7.6(a), the Purchaser's right to
demand registration pursuant to this Section 7.6(a) shall be suspended during
the period commencing 90 days before the date estimated in writing by the
Company to be the date of filing of a registration statement, and ending six
months following the effective date (or withdrawal date) of a registration
statement, for an underwritten public offering of the Common Stock.
All Participating Holders (including the Purchaser) proposing to
distribute securities through such registration shall enter into an underwriting
agreement with the managing or lead managing underwriter in the form customarily
used by such underwriter with such changes thereto as the parties thereto shall
agree. If any Participating Holder disapproves of the terms of any such
underwriting, it may elect to withdraw therefrom by written notice to the
Company and the managing or lead managing underwriter. Any Registrable
Securities so withdrawn from such underwriting shall be withdrawn from such
registration.
Whenever a registration is demanded pursuant to this Section 7.6(a),
unless a managing or lead managing underwriter objects thereto, the Company may
include in such registration securities for offering by the Company and any
other holder of securities, it being understood, however, that the Company's and
such other holder's right of inclusion in such registration shall be subordinate
to, and not pari passu with, the rights of the Participating Holders.
If the managing underwriter thereof determines that the total number of
shares of the Common Stock to be sold in such offering shall be limited due to
market conditions or otherwise, the reduction in the total number of shares
offered shall be made by first excluding any shares of selling stockholders who
are not holders of contractual rights to have such shares registered under the
Securities Act, then, if necessary, by reducing the total number of shares
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to be sold by the Company, and then, if necessary, by excluding pro rata (based
on the number of Registrable Securities held) the Registrable Securities to be
sold by the Participating Holders.
(b) Registration Statement Information Relating to the Purchaser. The
Purchaser shall promptly upon receipt of written request provide the Company or
any underwriter or counsel participating or otherwise involved in such
registration with any information relating to the Purchaser or the Registrable
Securities that is reasonably required to be included in the registration
statement or the prospectus, or any amendment thereof, relating to such offering
or required to cause the registration to be declared and remain effective. Such
information shall be submitted in writing, signed by the Purchaser, or a duly
authorized representative or agent thereof, and shall state that the information
is submitted specifically for the purpose of inclusion in the registration
statement, prospectus, offering circular or other document related to the
registration or qualification of the Registrable Securities pursuant to Section
7.6(a). If the Purchaser fails within a reasonable time to provide such
information, the Company may exclude from such registration the Registrable
Securities requested by the Purchaser to be included therein.
(c) Registration Procedures. If and whenever the Company is required to
effect the registration of any Registrable Securities of the Purchaser pursuant
to Section 7.6(a), the Company will:
(i) prepare and file with the Securities and Exchange Commission
(the "Commission") a registration statement with respect to such
Registrable Securities and use reasonable efforts to cause such
registration statement to become and remain effective as provided herein;
provided, however, that in connection with any proposed registration
intended to permit an offering of any securities from time to time (i.e.,
a so-called "shelf registration"), the Company shall in no event be
obligated to cause any such registration to remain effective for more than
120 days;
(ii) immediately notify the Purchaser, at any time when a prospectus
relating thereto is required to be delivered under the Securities Act, of
the happening of any event as a result of which the prospectus included in
the registration statement, as then in effect, includes an untrue
statement of a material fact or omits to state any material fact required
to be stated therein or necessary to make the statements therein not
misleading in the light of the circumstances then existing, and if it is
necessary, in the opinion of counsel to the Company, to prepare and file
with the Commission such amendments and supplements to such registration
statement and the prospectus used in connection therewith as may be
necessary to keep such registration statement effective and current and to
comply with the provisions of the Securities Act with respect to the sale
or other disposition of all shares covered by such registration statement,
including such amendments and supplements as may be necessary to reflect
the intended method of disposition from time to time of the Purchaser if
the registration is effected in connection with an offering which is not
underwritten, but in no event for more than (A) 120 days after the
effective date of a registration that is not underwritten or that is
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underwritten on a best efforts basis, or (B) for as long a period as is
customary and is required by the underwriter in the case of a firmly
underwritten offering;
(iii) furnish to the Purchaser such number of copies of a
prospectus, including a preliminary prospectus and any amendments and any
supplements thereto, in conformity with the requirements of the Securities
Act, as the Purchaser may reasonably request in order to facilitate the
public sale or other disposition of the Registrable Securities owned by
the Purchaser;
(iv) use reasonable efforts to register or qualify the Registrable
Securities covered by such registration statement under such other
securities or blue sky or other applicable laws of such jurisdictions
within the United States as the Purchaser shall reasonably request to
enable the Purchaser to consummate the public sale or other disposition in
such jurisdictions of the Registrable Securities owned by the Purchaser,
except that the Company shall not for any such purpose be required (i) to
qualify generally to do business as a foreign corporation in any
jurisdiction in which it would not be required to so qualify but for such
registration or qualification, (ii) to subject itself to taxation in any
such jurisdiction, or (iii) to consent to general service of process in
any such jurisdiction;
(v) use its best efforts to furnish to the Purchaser who has
included Registrable Securities in the registration a signed counterpart,
addressed to the Purchaser, of (A) an opinion of counsel for the Company,
dated the date of the closing under the underwriting agreement, and (B) a
"cold comfort" letter signed by the independent public accountants who
have issued a report on the Company's financial statements included in
such registration statement dated the date of effectiveness of the
registration statement and the date of the closing under the underwriting
agreement, covering substantially the same matters with respect to such
registration statement (and the prospectus included therein) and, in the
case of such accountants' letters, with respect to events subsequent to
the date of such financial statements, as are customarily covered in
opinions of issuer's counsel and in accountants' letters delivered to
underwriters in underwritten public offerings of securities and, in the
case of the accountants' letters, such other financial matters as the
Purchaser may reasonably request;
(vi) otherwise use its best efforts to comply with all applicable
rules and regulations of the Commission, and make available to its
security holders, as soon as reasonably practicable, an earnings statement
covering the period of at least 12 months, beginning with the first month
of the first fiscal quarter after the effective date of such registration
statement, which earnings statement shall satisfy the provisions of
Section 11(a) of the Securities Act;
(vii) use its best efforts to list such Registrable Securities on
each securities exchange or over-the-counter market on which shares of
Common Stock are then listed, if such Registrable Securities are not
already so listed and if such listing is then
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permitted under the rules of such exchange and, if shares of Common Stock
are not then listed on a securities exchange or over-the-counter market,
to use its best efforts to cause such Registrable Securities to be listed
on such securities exchange or over-the-counter market as the managing or
lead managing underwriter shall reasonably request;
(viii) use its best efforts to provide a transfer agent and
registrar for such Registrable Securities not later than the effective
date of such registration statement; and
(ix) issue to any underwriter to which the Purchaser may sell such
Registrable Securities in connection with any such registration (and to
any direct or indirect transferee of any such underwriter) certificates
evidencing such Registrable Securities without restrictive legends.
If requested by the managing or lead managing underwriter for any
underwritten offering that includes any Registrable Securities, the Company will
enter into an underwriting agreement with the underwriters of such offering,
such agreement to contain such representations and warranties by the Company and
such other terms and conditions as are contained in underwriting agreements
customarily used by such managing or lead managing underwriter with such changes
as the parties thereto shall agree, including, without limitation, provisions
relating to indemnification and contribution in lieu thereof.
During the effective period of any registration statement covering
Registrable Securities, the Purchaser will not effect sales thereof after
receipt of telegraphic or written notice from the Company to suspend sales to
permit the Company to correct or update a registration statement or prospectus
until the Purchaser receives written notice from the Company that the
registration statement or prospectus has been corrected or updated.
At the end of the effective period of any registration statement covering
any Registrable Securities, the Purchaser shall discontinue sales of shares
pursuant to such registration statement upon receipt of notice from the Company
of its intention to remove from registration the shares covered by such
registration statement which remain unsold, and the Purchaser shall notify the
Company of the number of shares registered which remain unsold immediately upon
receipt of such notice from the Company.
(d) Expenses of Registration. Subject to the requirements of otherwise
applicable state blue sky laws, all expenses incurred in effecting registration
of any Registrable Securities pursuant to Section 7.6(a), including without
limitation, all registration, qualification and filing fees, printing expenses,
expenses of compliance with blue sky laws (excluding any such expenses incurred
solely due to the Purchaser's request pursuant to Section 7.6(c)(iv)),
reasonable fees and disbursements of counsel for the Company, and expenses of
any audits incidental to or required by any such registration, shall be borne by
the Company, provided that the commissions and discounts of the underwriters
applicable to the Registrable Securities shall be borne by the securityholders
whose Registrable Securities are being registered
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pursuant to such registration, pro rata according to the value of their
Registrable Securities sold under such registration.
(f) Indemnification.
(i) In any registration in which the Purchaser participates, the
Company will indemnify the Purchaser and each underwriter and selling
broker for the Purchaser and each officer and director of the Purchaser
and each person, if any, who controls the Purchaser or any such
underwriter or broker within the meaning of Section 15 of the Securities
Act, against all claims, losses, damages, expenses and liabilities (or
actions in respect thereof), including any of the foregoing incurred in
settlement of any litigation, commenced or threatened, arising out of or
based on any untrue statement (or alleged untrue statement) of a material
fact contained in any preliminary prospectus or amended preliminary
prospectus or in the prospectus, offering circular or other document
incident to any registration, qualification or compliance (or in any
related registration statement, notification or the like) as such may be
amended or supplemented from time to time 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 light of the circumstances
under which they were made, not misleading, or any violation by the
Company of the Securities Act or any rule or regulation promulgated
thereunder or any state securities laws or regulations applicable to the
Company in connection with any such registration, qualification or
compliance, and will reimburse the Purchaser and each such underwriter,
broker and controlling person for any legal and any other expenses
reasonably incurred, as such expenses are incurred, in connection with
investigating or defending any such claim, loss, damage, liability or
action; provided, however, that the Company will not be liable in any such
case to the extent that any such claim, loss, damage or liability arises
out of or is based on any untrue statement or omission made in reliance
upon and in conformity with written information furnished to the Company
in an instrument executed by the Purchaser or the underwriter for the
Purchaser or any representative of the Purchaser or the underwriter for
the Purchaser and stated to be specifically for use therein.
(ii) In any registration in which the Purchaser participates, the
Purchaser will indemnify the Company and its officers and directors, each
person, if any, who controls any thereof within the meaning of Section 15
of the Securities Act and their respective successors and any underwriter
for the Company for such registration and each other securityholder
participating in the registration against all claims, losses, damages,
expenses 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 preliminary prospectus or amended prospectus or in
the prospectus, offering circular or other document incident to any
registration statement, qualification or compliance (or in any related
registration statement, notification or the like) as such may be amended
or supplemented from time to time 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 light of the circumstances under which
they were made,
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not misleading, and will reimburse the Company and each other person
indemnified pursuant to this paragraph (ii) for any legal and any other
expenses reasonably incurred, as such expenses are incurred, in connection
with investigating or defending any such claim, loss, damage, liability or
action; provided, however, that this paragraph (ii) shall apply only if
(and only to the extent that) such statement or omission was made in
reliance upon and in conformity with written information (including,
without limitation, written negative responses to inquiries) furnished to
the Company specifically for inclusion in the prospectus, offering
circular, or other document incident to the registration statement by an
instrument duly executed by the Purchaser or its representatives, and as
to which the Company had no actual knowledge. Notwithstanding the
foregoing, the liability of the Purchaser under this paragraph (ii) shall
be limited to an amount equal to the aggregate proceeds received by the
Purchaser from the sale of its shares in such registration, unless such
liability arises out of or is based on willful conduct by the Purchaser.
(iii) Each party entitled to indemnification hereunder (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 (at its expense) to assume
the defense of any claim or any litigation resulting therefrom, provided
that counsel for the Indemnifying Party, who shall conduct the defense of
such claim or litigation, shall be satisfactory to the Indemnified Party,
and the Indemnified Party may participate in such defense at such party's
expense, and provided, further, that the omission by any Indemnified Party
to give notice as provided herein shall not relieve the Indemnifying Party
of its obligations under this Section 7.6(e) except to the extent that the
omission results from a failure of actual notice to the Indemnifying Party
by the Indemnified Party and such Indemnifying Party is damaged solely as
a result of the failure to give notice; and provided further, however,
that the Indemnifying Party shall not be entitled to assume the defense
for matters as to which there is, in the opinion of counsel to the
Indemnified Party, a conflict of interest or separate and different
defenses. No Indemnifying Party, in the defense of any such claim or
litigation, shall, except with the consent of each Indemnified Party,
consent to entry of any judgment or enter into any settlement which does
not include as an unconditional term thereof the giving by the claimant or
plaintiff to such Indemnified Party of a release from all liability in
respect of such claim or litigation.
(iv) The payments with respect to any indemnity required by this
Section 7.6(e) shall be made by periodic payments during the course of the
investigation or defense, as and when bills are received or expenses
incurred, upon submission of supporting invoices or other claims for
payment, including any calculations necessary to pro-rate any amounts
payable pursuant to the indemnity.
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(f) Contribution.
(i) If the indemnification provided for in Section 7.6(e) hereof is
unavailable to the Indemnified Parties in respect of any losses, claims,
damages, liabilities or expenses (or actions in respect thereof) referred
to therein, then each such Indemnifying Party, in lieu of indemnifying
such Indemnified Party, shall contribute to the amount paid or payable by
such Indemnified Party as a result of such losses, claims, damages,
liabilities or expenses (or actions in respect thereof) in such proportion
as is appropriate to reflect the relative fault of the Indemnifying Party
on the one hand and the Indemnified Party on the other in connection with
the statement or omission which resulted in such losses, claims, damages,
liabilities or expenses (or actions in respect thereof), as well as any
other relevant equitable considerations. The relative fault shall be
determined by reference to, among other things, whether the untrue
statement (or alleged untrue statement) of a material fact or the omission
(or alleged omission) to state a material fact relates to information
supplied by the Indemnifying Party or the Indemnified Party and the
parties' relative intent, knowledge, access to information and opportunity
to correct or prevent such statement or omission. The Company and each
Purchaser agree that it would not be just and equitable if contribution
pursuant to this Section 7.6(f) were determined by pro rata allocation or
by any other method of allocation which does not take account of the
equitable considerations referred to above. The amount paid or payable by
an Indemnified Party as a result of the losses, claims, damages,
liabilities or expenses (or actions in respect thereof) referred to above
in this Section 7.6(f) or in Section 7.6(e) shall be deemed to include any
legal or other expenses reasonably incurred by such Indemnified Party in
connection with investigating or defending any such action or claim.
(ii) Notwithstanding anything to the contrary contained herein, the
obligation of the Purchaser to contribute pursuant to this Section 7.6(f)
is several and not joint and the Purchaser shall not be required to
contribute any amount in excess of the amount by which the total price at
which the shares of the Purchaser were offered to the public exceeds the
amount of any damages which the Purchaser has otherwise been required to
pay by reason of such untrue statement (or alleged untrue statement) or
omission (or alleged omission).
(iii) 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.
(g) Rule 144 Requirements. The Company shall make whatever filings with
the Commission or otherwise and undertake to make publicly available and
available to the Purchaser, pursuant to Rule 144 of the Commission under the
Securities Act (or any successor rule or regulation), such information as is
necessary to enable the Purchaser to make sales of Registrable Securities
pursuant to that Rule. The Company shall furnish to the Purchaser,
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upon request, a written statement executed by the Company as to the steps it has
taken to comply with the current public information requirements of Rule 144.
(h) Survival and Termination of Rights. The agreements and covenants
contained in this Section 7.6 shall be continuing and shall survive any
permitted transfer of the Shares. However, the rights of the Purchaser to cause
the Company to register its Registrable Securities hereunder shall terminate
with respect to such securities and such securities shall no longer be deemed to
be Registrable Securities following a bona fide, firmly underwritten public
offering of such Registrable Securities under the Securities Act or at such time
as the Purchaser is able to dispose of all of its Registrable Securities in one
three-month period pursuant to the provisions of Rule 144.
Section 8 Covenants of the Purchaser
Until the termination of this Agreement in accordance with Section 11.1
hereof or of the particular covenant, as the case may be:
8.1 Limitation on Ownership of Voting Stock.
(a) The Purchaser shall not (and shall not permit any subsidiary to
directly or indirectly) acquire beneficial ownership of any Voting Stock, any
securities convertible into or exchangeable for Voting Stock, or any other
rights to acquire Voting Stock (except, in any case, by way of stock dividends
or other distributions or offerings made available to holders of any Voting
Stock generally) or authorize or make a tender, exchange or other offer, without
the written consent of the Company, if the effect of such acquisition would be
to increase the Voting Power of all Voting Stock then owned by the Purchaser or
which it has a right to acquire to more than 20% of the Total Voting Power of
the Company (as such terms are defined in Section 10).
(b) Nothing in Section 8.1(a) above shall prevent the Purchaser from
acquiring Voting Stock without regard to the limitation set forth therein (i) if
an offer not approved by the Company's Board of Directors is made (as evidenced
by the filing with the SEC of a Schedule 14D-1) by another person or group
(which is not controlled by or under common control with the Purchaser) to
purchase or exchange for cash or other consideration any Voting Stock which is a
bona fide offer and which, if successful, would result in such person or group
owning or having the right to acquire more than 40% of the Total Voting Power of
the Company then in effect and such offer is not withdrawn, terminated or
enjoined prior to the Purchaser acquiring Voting Stock in response thereto, or
(ii) if it is publicly disclosed or the Purchaser otherwise learns that another
person or group has acquired any Voting Stock (or rights to acquire Voting
Stock) without the affirmative support of the Company's Board of Directors,
which results in such person or group owning or having the right to acquire
Voting Stock with Total Voting Power of not less than 20%.
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8.2 Voting. The Purchaser shall take such action as may be required so
that all shares of Voting Stock owned by the Purchaser are voted in favor of
nominees to the Board of Directors of the Company in accordance with the
recommendation of the Board of Directors. Unless the Company otherwise consents
in writing, the Purchaser shall take such action as may be required so that all
shares of Voting Stock owned by the Purchaser are voted in accordance with the
recommendations of the Board of Directors on all other matters to be voted on by
holders of Voting Stock; provided, however, that if the Purchaser disagrees with
the Board's recommendation as to any matter (including the election of
directors), the Voting Stock owned by Purchaser may be voted with respect to
such matter in not less than the same proportion as the votes cast by the other
holders of Voting Stock with respect to such matter; and provided further, that
Voting Stock owned by the Purchaser may be voted as the Purchaser determines in
its sole discretion on any Significant Event (as defined in Section 10)
presented to be voted on by the holders of Voting Stock. The Purchaser, as the
holder of shares of Voting Stock, shall be present, in person or by proxy, at
all meetings of shareholders of the Company so that all shares of Voting Stock
beneficially owned by the Purchaser may be counted for the purposes of
determining the presence of a quorum at such meetings.
8.3 Voting Trust, etc. The Purchaser shall not deposit any shares of
Voting Stock in a voting trust or, except as otherwise provided herein, subject
any Voting Stock to any arrangement or agreement with respect to the voting of
such Voting Stock.
8.4 Solicitation of Proxies. The Purchaser shall not solicit proxies with
respect to any Voting Stock, and shall not become a "participant" in any
"election contest" (as such terms are used in Rule 14a-11 of Regulation 14A
under the Exchange Act relating to the election of directors of the Company).
8.5 Acts in Concert with Others. The Purchaser shall not join a
partnership, limited partnership, syndicate or other group, or otherwise act in
concert with any third person, for the purpose of acquiring, holding, or
disposing of Voting Stock.
8.6 Restrictions on Transfer of Voting Stock.
(a) The Purchaser shall not, directly or indirectly, sell or transfer any
Voting Stock for a period of two years commencing with the Closing Date.
(b) Subject to Section 8.6(a), the Purchaser shall not, directly or
indirectly, sell or transfer any Voting Stock except:
(i) to the Company or any person or group approved by the
Company;
(ii) to a corporation of which the Purchaser owns not less than 80%
of the Total Voting Power entitled to be cast in the election of directors
and which is not a direct competitor with the Company (a "Controlled
Corporation"), as long as such Controlled Corporation agrees to hold such
Voting Stock subject to all the provisions of this Agreement, including
this Section 8.6, and agrees to transfer such Voting Stock to
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the Purchaser or another Controlled Corporation of the Purchaser if it
ceases to be a Controlled Corporation of the Purchaser;
(iii) pursuant to Rule 144 under the Securities Act (but only to the
extent the sale or transfer of Voting Stock at any time is in compliance
with the volume limitations of paragraph (e) thereunder);
(iv) subject to the Company's right of first refusal as set forth
in Section 9.1 hereof, pursuant to an effective registration statement
under the 1933 Securities Act or in transactions not otherwise described
herein as long as such transactions do not, directly or indirectly,
individually or in the aggregate, result, to the best knowledge of the
Purchaser, after reasonable inquiry, in any single person or group owning
or having the right to acquire Voting Stock representing 5% or more of the
Total Voting Power of the Company then in effect;
(v) in response to (A) an offer to purchase or exchange for cash
or other consideration any Voting Stock (I) which is made by or on behalf
of the Company, or (II) which is made by another person or group and is
not opposed by the Board of Directors of the Company within the time such
Board is required, pursuant to regulations under the Exchange Act, to
advise the Company's shareholders of such Board's position on such offer,
or (B) subject to the Company's rights of first refusal as set forth in
Section 9.1, any other offer made by another person or group to purchase
or exchange for cash or other consideration any Voting Stock which, if
successful, would result in such person or group owning or having the
right to acquire Voting Stock representing more than 50% of the Total
Voting Power of the Company then in effect;
(vi) pursuant to a bona fide pledge of such Voting Stock to an
institutional lender to secure a loan, guarantee or other financial
support, provided that such lender agrees to hold such Voting Stock
subject to all provisions of this Agreement and any sale or disposition by
such lender of such pledged Voting Stock shall be subject to the
limitations of this Section 8.6;
(vii) in the event of a merger or consolidation in which the holders
of Voting Stock of the Company prior to the merger or consolidation cease
to hold at least 51% of the Voting Stock of the surviving entity; or
(viii) pursuant to a plan of liquidation of the Company.
Any shares permitted to be sold hereunder shall be free and clear of the
restrictions contained in this Agreement.
8.7 Confidential Information. The Company from time to time may disclose
to the Purchaser pursuant to this Agreement certain technical and nontechnical
business information which the Company deems to be confidential. Notwithstanding
any other provision of this Agreement, including provisions regarding the
termination of this Agreement or particular
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terms of this Agreement, the Purchaser shall not disclose such information to
third parties until the earliest of (i) the date upon which such information
becomes public knowledge through no fault of the Purchaser, (ii) the date upon
which the Company discloses such information to a third party on an unrestricted
basis, (iii) the date such information is required to be disclosed by law or a
court of competent jurisdiction, or (iv) the fifth anniversary of the date of
disclosure. In the event that the Purchaser or any of its representatives is
requested or required to disclose any of the confidential information referred
to above, the Purchaser will provide the Company with prompt notice of such
request or requirement so that the Company may seek a protective order or waive
the Purchaser's compliance with this Section, as appropriate. The Purchaser
further acknowledges and understands that any information so obtained which may
be considered "inside" nonpublic information will not be utilized by the
Purchaser in connection with purchases and/or sales of the Company's securities
except in compliance with applicable state and federal securities laws.
8.8 Company Right of Repurchase. If at any time there is a Change in
Control of the Purchaser, other than in connection with the transaction between
the Purchaser and one of the two Delta candidates confidentially disclosed to
the Company under separate cover, and other than a Change of Control of
Purchaser involving another entity having any operations related to rapid
coagulation monitoring systems, then the Company shall have the right to
purchase all, but not a part of, the Voting Stock then beneficially owned by the
Purchaser and its subsidiaries upon or prior to the effective date of the Change
in Control of the Purchaser. The purchase price per share of such Voting Stock
shall be the Average Market Price (as defined below) as of the date of the
Company's exercise of its right to repurchase. The Company may assign its right
of repurchase under this Section to any other person or persons; provided,
however, that the Company shall provide to the Purchaser not less than three
business days prior notice of such assignment. "Average Market Price" of any
security at any date shall be the average of the closing prices for a share or
other single unit of such security on the 30 consecutive trading days ending on
the trading date last preceding the date of determination of such price on the
principal national securities exchange on which such security is listed, or, if
such security is not listed on any national securities exchange, the average of
the closing sales prices for a share of such security on the National
Association of Securities Dealers Automated Quotation Systems ("NASDAQ") or, if
such closing sales prices shall not be reported on NASDAQ, the average of the
mean between the closing bid and asked prices of a share of such security in
such case as reported by The Wall Street Journal, or, if such prices shall not
be so reported, as the same shall be reported by the National Quotation Bureau
Incorporated, or, in all other cases, the value as determined by a single
nationally recognized investment banking firm jointly selected by the Company
and the Purchaser. For this purpose, the parties shall use their best efforts to
cause any determination of the value to be made within 10 business days after
the date on which the value is to be measured. The determination by the
investment banking firm selected in the manner set forth above shall be
conclusive.
8.9 Acquisition of Stock. The Purchaser shall advise management of the
Company as to the Purchaser's acquisition of any additional shares of Voting
Stock, or rights thereto, in writing within 10 calendar days following any such
acquisition. All of the Purchaser's
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purchases of Voting Stock shall be in compliance with applicable laws and
regulations and the provisions of this Agreement.
Section 9 Company Right of First Refusal
Until the termination of this Agreement in accordance with Section 11.1
hereof or of the particular covenant:
9.1 Right of First Refusal. Prior to making any sale or transfer of Voting
Stock of the Company pursuant to Section 8.6(b)(iv), the Purchaser shall give
the Company the opportunity to purchase such Voting Stock in the following
manner:
(a) The Purchaser shall give notice (the "Transfer Notice") to the
Company in writing of such intention specifying the approximate number of
the proposed purchasers or transferees, the amount of Voting Stock
proposed to be sold or transferred, the proposed price per share therefor
(the "Transfer Price") and the other material terms upon which such
disposition is proposed to be made.
(b) The Company shall have the right, exercisable by written notice
given by the Company to the Purchaser within 30 days after receipt of such
Transfer Notice, to purchase all but not part of the Voting Stock
specified in such Transfer Notice for cash per share equal to the Transfer
Price.
(c) If the Company exercises its right of first refusal hereunder,
the closing of the purchase of the Voting Stock with respect to which such
right has been exercised shall take place within 60 calendar days after
the Company receives notice, which period of time shall be extended if
necessary in order to comply with any applicable laws and regulations.
Upon exercise of its right of first refusal, the Company and the Purchaser
shall be legally obligated to consummate the purchase contemplated thereby
and shall use their best efforts to secure any approvals required in
connection therewith.
(d) If the Company does not exercise its right of first refusal
hereunder within the time specified for such exercise, the Purchaser shall
be free, during the period of 90 calendar days following the expiration of
such time for exercise, to sell the Voting Stock specified in such
Transfer Notice and if no sale occurs within such time period, the Voting
Stock shall again be subject to the provisions of this Section 9.1. The
Purchaser's transferee shall acquire such Voting Stock free from any of
the provisions of this Agreement; however, such Voting Stock shall be
subject to any restrictions imposed under applicable securities laws.
(e) Notwithstanding anything to the contrary contained in this
Section 9.1, if Purchaser intends to sell or transfer any Voting Stock of
the Company pursuant to Section 8.6(b)(iv), and such proposed sale or
transfer is to an institutional purchaser approved by the Company at or
above the Average Market Price, then the Company must exercise its right
of first refusal, if at all, within ten (10) business days of receipt
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of the Transfer Notice, and if not, the proposed transfer shall thereafter
be subject to the provisions of subparagraph 9.1(d) above.
9.2 Tender Offer Sale. Prior to making any sale or exchange of Voting
Stock pursuant to Section 8.6(b)(v)(B) in response to a tender or exchange
offer, the Purchaser shall give the Company the opportunity to purchase such
Voting Stock in the following manner:
(a) The Purchaser shall give notice (the "Tender Notice") to the
Company in writing of such intention no later than 10 calendar days prior
to the latest time by which Voting Stock must be tendered in order to be
accepted pursuant to such offer or to qualify for any proration applicable
to such offer (the "Tender Date"), specifying the amount of Voting Stock
proposed to be tendered. For purposes hereof, a tender offer to purchase
Voting Stock shall be deemed to be an offer at the price specified
therein, without regard to any provisions thereof with respect to
proration or conditions to the offeror's obligation to purchase (assuming
such conditions are not impossible of performance when the offer is made,
without giving effect to the Company's right of first refusal).
(b) If the Tender Notice is given, the Company shall have the right,
exercisable by giving notice to the Purchaser at least two business days
prior to the Tender Date, to purchase all but not part of the Voting Stock
specified in the Tender Notice for cash. If the Company exercises such
right by giving such notice, the closing of the purchase of such Voting
Stock shall take place not later than one business day prior to the Tender
Date; provided, however, that if the purchase price specified in the
tender offer includes any property other than cash, the value of any
property included in the purchase price shall be jointly determined by a
nationally recognized investment banking firm selected by each party or,
in the event such firms are unable to agree, a third nationally recognized
investment banking firm to be selected by such two firms. For this
purpose:
(c) The parties shall use their best efforts to cause any
determination of the value of any securities included in the purchase
price to be made within three business days after the date of delivery of
the Tender Notice. If the firms selected by the Purchaser and the Company
are unable to agree upon the value of any such securities within such
three-day period, the firms shall promptly select a third firm whose
determination shall be made promptly and shall be conclusive.
(d) The parties shall use their best efforts to cause any
determination of the value of property other than securities to be made
within four business days after the date of delivery of the Tender Notice.
If the firms selected by the Purchaser and the Company are unable to agree
upon a value within such four-day period, the firms shall promptly select
a third firm whose determination shall be made promptly and shall be
conclusive.
(e) The purchase price to be paid by the Company pursuant to this
Section 9.2 shall be (x) if such tender offer is consummated, the purchase
price that the
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Purchaser would have received if it had tendered the Voting Stock
purchased by the Company and all such Voting Stock had been purchased in
such tender offer, including any increases in the price paid by the tender
offeror after exercise by the Company of its right of first refusal
hereunder, or (y) if such tender offer is not consummated, the highest
bona fide price offered pursuant thereto, in each case with property, if
any, to be valued as aforesaid. Each party shall bear the cost of its own
investment banking firm and the parties shall share the cost of any third
firm selected hereunder.
(f) If the Company does not exercise such right by giving such
notice or fails to complete the purchase, then the Purchaser shall be free
to accept the tender offer with respect to which the Tender Notice was
given.
(g) If the Company does not purchase the shares, the Company will
provide such assurance as the tender offeror shall reasonably request to
provide the tender offeror with certificates for the Purchaser's shares
without legends referring to this Agreement.
9.3 Assignment of Rights. In the event that the Company elects to exercise
a right of first refusal under this Section 9, the Company may specify, prior to
closing such purchase and upon not less than three business days prior notice to
the Purchaser, another person as its designee to purchase the Voting Stock to
which such notice relates. If the Company shall designate another person as the
purchaser pursuant to this Section 9, the giving of notice of acceptance of the
right of first refusal by the Company shall constitute a legally binding
obligation of the Company to complete such purchase if such designee shall fail
to do so.
Section 10 Definitions
10.1 Certain Definitions. As used in this Agreement:
(a) The term "Total Voting Power of the Company" means the total
number of votes which may be cast in the election of directors of the
Company at any meeting of shareholders of the Company if all securities
entitled to vote in the election of directors of the Company were present
and voted at such meeting (other than votes that may be cast only upon the
happening of a contingency).
(b) The term "Voting Stock" means the Common Stock, Preferred Stock
and any other securities issued by the Company having the ordinary power
to vote in the election of directors of the Company (other than securities
having such power only upon the happening of a contingency).
(c) The term "Significant Event" means (i) a disposition of the
Company (by way of merger, disposition of all or substantially all assets
or otherwise), (ii) a liquidation or dissolution of the Company, (iii) any
vote pursuant to any provision of law or the Company's Certificate of
Incorporation or Bylaws requiring or permitting shareholders to approve
any business combination proposed by or with another person or its
affiliates which have acquired a certain percentage of the Company's
shares or to
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grant voting rights to such person or to waive or adopt provisions
requiring such a vote, or (iv) any transaction the effect of which is to
cause the Voting Stock of the Company to be neither listed on any national
securities exchange nor authorized to be quoted on any national
inter-dealer quotation system.
(d) "Change in Control of the Purchaser" shall mean any of the
following: (i) a merger or consolidation to which the Purchaser is a party
if the shareholders of the Purchaser immediately prior to the effective
date of such merger or consolidation have beneficial ownership of voting
securities representing less than 50% of the Total Voting Power of the
surviving corporation following such merger or consolidation; (ii) an
acquisition by any person, entity or group of direct or indirect
beneficial ownership of voting securities of the Purchaser representing
40% or more of the Total Voting Power of Purchaser then issued and
outstanding; (iii) a sale of all or substantially all the assets of
Purchaser; (iv) a liquidation of Purchaser; or (v) a change in the
composition of the Board of Directors of Purchaser such that during any
consecutive 24-month period, directors who are members of the Board at the
beginning of such 24-month period, or their successors who were elected,
nominated or recommended by at least a majority of the Board of Directors
as constituted at the time of their appointment to the Board, cease to
constitute at least a majority of the Board of Directors.
(e) The term "group" shall have the meaning comprehended by Section
13(d)(3) of the Exchange Act and the rules and regulations promulgated
thereunder.
(f) The term "person" shall mean any person, individual,
corporation, partnership, trust or other nongovernmental entity or any
governmental agency, court, authority or other body (whether foreign,
federal, state, local or otherwise).
Section 11 Miscellaneous
11.1 Termination of Agreement.
(a) The Company may terminate its obligation to perform or observe any of
its covenants and agreements hereunder if the Purchaser violates any of the
covenants or agreements of the Purchaser under this Agreement or the
distribution agreement between Purchaser and Company of even date herewith, and
the Purchaser may terminate its obligations to perform or observe any of its
covenants and agreements hereunder if the Company violates or fails to perform
any of the covenants or agreements of the Company under this Agreement;
provided, however, that the Company or the Purchaser, as the case may be, may
not terminate any of its obligations under this Agreement pursuant to this
sentence unless it shall have delivered written notice of such default to the
other party and such default shall not have been cured within 30 calendar days
after the delivery of such notice.
(b) From and after the termination of this Agreement, the covenants,
obligations and agreements of the parties set forth herein shall be of no
further force or effect and the parties shall be under no further obligation
with respect thereto.
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(c) Notwithstanding the provisions of this Section 11.1, the respective
obligations of the Company and the Purchaser under Section 8.7 of this Agreement
shall survive any termination of this Agreement.
11.2 Best Efforts. As long as the other party hereto is not in default of
any material obligation under this Agreement, each of the Company and the
Purchaser shall use its best efforts to take all actions required under any law,
rule or regulation adopted subsequent to the date hereto in order that the
respective agreements and covenants of the parties hereto may be carried out on
a timely basis in the manner contemplated by this Agreement.
11.3 Governing Law. This Agreement shall be governed in all respects by
the laws of the State of North Carolina as applied to contracts entered into
solely between residents of, and to be performed entirely within, such state.
11.4 Survival. The representations and warranties in Sections 3 and 4 of
this Agreement shall survive any investigation made by the Purchaser or the
Company and the Closing, and shall expire one year after the Closing; provided
that such representations and warranties shall not be construed so as to
constitute representations and warranties concerning circumstances existing
after the date of this Agreement (except for the representation made in Section
4.1 hereof which shall be deemed to be made by the Purchaser in connection with
each purchase of shares purchased from the Company pursuant to this Agreement).
11.5 Successors and Assigns. This Agreement shall be binding upon and
shall inure to the benefit of the parties hereto and their respective successors
and assigns. Except as otherwise provided in this Agreement, this Agreement may
not be assigned by a party without the prior written consent of the other party
except by operation of law, in which case the assignee shall be subject to all
of the provisions of this Agreement. The Purchaser may not assign this Agreement
to any pledgee of its shares of Common Stock.
11.6 Entire Agreement; Amendment. This Agreement and the other documents
delivered pursuant hereto constitute the full and entire understanding and
agreement between the parties with regard to the subject matter hereof and
thereof and supersede all prior agreements and understandings among the parties
relating to the subject matter hereof. No party shall be liable or bound to any
other party in any manner by any warranties, representations or covenants except
as specifically set forth herein. Neither this Agreement nor any term hereof may
be amended, waived, discharged or terminated other than by a written instrument
signed by the party against whom enforcement of any such amendment, waiver,
discharge or termination is sought.
11.7 Notices and Dates. Any notice or other communication given under this
Agreement shall be sufficient if in writing and delivered by hand, by messenger
or by courier, or transmitted by facsimile, to a party at its address set forth
below (or at such other address as shall be designated for such purpose by such
party in a written notice to the other party hereto):
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if to the Company, to it at:
Cardiovascular Diagnostics, Inc.
5301 Departure Drive
Raleigh, North Carolina 27604
Attention: President
Fax: (919) 954-9932
with a copy to:
Larry E. Robbins, Esq.
Wyrick Robbins Yates & Ponton, LLP
4101 Lake Boone Trail, Suite 300
Raleigh, North Carolina 27607
Fax: (919) 781-4865
if to Purchaser, to it at:
Chiron Diagnostics Corporation
63 North Street
Medfield, Massachusetts 02052
Attention: Senior Vice President and General Manager
Critical Care
Fax: (508) 359-3115
with a copy to:
Chiron Diagnostics Corporation
63 North Street
Medfield, Massachusetts 02052
Attention: General Counsel
Fax: (508) 359-3885
Each such notice or other communication shall for all purposes of this Agreement
be treated as effective or having been given when delivered if delivered
personally, by messenger or by courier, or, if sent by facsimile, upon
confirmation of receipt.
11.8 Specific Performance. The parties hereto acknowledge and agree that
irreparable damage would occur in the event any of the provisions of this
Agreement were not performed in accordance with their specific terms or were
otherwise breached and that such damage would not be compensable in money
damages and that it would be extremely difficult or impracticable to measure the
resultant damages. It is accordingly agreed that any party hereto shall be
entitled to an injunction or injunctions to prevent breaches of the provisions
of the Agreement and to enforce specifically the terms and provisions hereof, in
addition to any
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other remedy to which it may be entitled at law or equity, and such party that
is sued for breach of this Agreement expressly waives any defense that a remedy
in damages would be adequate and expressly waives any requirement in an action
for specific performance for the posting of a bond by the party bringing such
action.
11.9 Further Assurances. The parties hereto shall do and perform or cause
to be done and performed all such further acts and things and shall execute and
deliver all such other agreements, certificates, instruments or documents as any
other party may reasonably request from time to time in order to carry out the
intent and purposes of this Agreement and the consummation of the transactions
contemplated hereby. Neither the Company nor the Purchaser shall voluntarily
undertake any course of action inconsistent with satisfaction of the
requirements applicable to them set forth in this Agreement and each shall
promptly do all such acts and take all such measures as may be appropriate to
enable them to perform as early as practicable the obligations herein required
to be performed by them.
11.10 Counterparts. This Agreement may be executed in any number of
counterparts, each of which may be executed by fewer than all of the parties,
each of which shall be enforceable against the parties actually executing such
counterparts, and all of which together shall constitute one instrument.
11.11 Severability. In the event that any provision of this Agreement
becomes or is declared by a court of competent jurisdiction to be illegal,
unenforceable or void, this Agreement shall continue in full force and effect
without said provision; provided, that no such severability shall be effective
if it materially changes the economic impact of this Agreement on any party.
11.12 Captions. Headings of the various sections of this Agreement have
been inserted for convenience of reference only and shall not be relied upon in
construing this Agreement. Use of any gender herein to refer to any person shall
be deemed to comprehend masculine, feminine and neuter unless the context
clearly requires otherwise.
11.13 Public Statements. The Company and the Purchaser agree not to issue
any public statement with respect to the Purchaser's investment or proposed
investment in the Company or the terms of any agreement or covenant among them
without the other party's reasonable prior written consent, except such
disclosures as may be required under applicable law or under any applicable
order, rule or regulation or, in the case of the Company, except as necessary to
pursue discussions with other strategic investors.
11.14 Brokers.
(a) The Company has not engaged, consented to or authorized any broker,
finder or intermediary to act on its behalf, directly or indirectly, as a
broker, finder or intermediary in connection with the transactions contemplated
by this Agreement. The Company hereby agrees to indemnify and hold harmless the
Purchaser from and against all fees, commissions or other payments owing to any
such person or firm acting on behalf of the Company hereunder.
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(b) The Purchaser has not engaged, consented to or authorized any broker,
finder or intermediary to act on its behalf, directly or indirectly, as a
broker, finder or intermediary in connection with the transactions contemplated
by this Agreement. The Purchaser hereby agrees to indemnify and hold harmless
the Company from and against all fees, commissions or other payments owning to
any such person or firm acting on behalf of the Purchaser hereunder.
11.15 Costs and Expenses. Each party hereto shall pay its own costs and
expenses incurred in connection herewith, including the fees of its counsel,
auditors and other representatives, whether or not the transactions contemplated
herein are consummated.
11.16 No Third-Party Rights. Nothing in this Agreement shall create or be
deemed to create any rights in any person or entity not a party to this
Agreement except for such rights as may exist by virtue of any contract or other
agreement existing on the date hereof.
11.17 Attorneys' Fees. The prevailing party in any litigation between the
Purchaser and the Company involving this Agreement shall be entitled to recover
from the other party its reasonable attorneys' fees and costs.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective authorized officers as of the date first above
written.
CARDIOVASCULAR DIAGNOSTICS, INC.
By:_______________________________________
Name:_____________________________________
Title:____________________________________
CHIRON DIAGNOSTICS CORPORATION
By:_______________________________________
Name:_____________________________________
Title:____________________________________
27
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement of Cardiovascular
Diagnostics, Inc. and subsidiaries on Form S-4 of our report dated February 12,
1998, on our audits of the consolidated financial statements and Schedule II -
Valuation and Qualifying Accounts of Cardiovascular Diagnostics, Inc. and
subsidiaries as of December 31, 1997 and 1996, and for each of the three years
in the period ended December 31, 1997. We also consent to the references to our
firm under the caption "Experts".
/s/ PRICEWATERHOUSECOOPERS LLP
Raleigh, North Carolina
October 22, 1998
