AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 10, 1999
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------------
CARDIA, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MINNESOTA 3842 41-1923885
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
13754 FRONTIER COURT
BURNSVILLE, MINNESOTA 55337
TELEPHONE: (612) 997-2100
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
--------------------------------
JOSEPH A. MARINO
CHIEF EXECUTIVE OFFICER
CARDIA, INC.
13754 FRONTIER COURT
BURNSVILLE, MINNESOTA 55337
TELEPHONE: (612) 997-2100
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
--------------------------------
COPIES TO:
PATRICK DELANEY TODD F. BASSINGER
JEFFREY SAUNDERS DUCKSON & CARLSON LLC
LINDQUIST & VENNUM P.L.L.P. 10 SOUTH FIFTH STREET
4200 IDS CENTER SUITE 300
80 SOUTH 8TH STREET MINNEAPOLIS, MINNESOTA 55402
MINNEAPOLIS, MINNESOTA 55402-2205 (612) 317-9746
(612) 371-3211
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable following the effectiveness of this Registration Statement and
the effective time of the proposed merger of Video Learning Systems, Inc. with
and into Cardia, Inc., as described in the Agreement and Plan of Merger, dated
as of July 1, 1999, attached as Appendix A to the Proxy Statement/Prospectus
forming a part of this Registration Statement.
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 Instruction G, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(a) 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 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
<TABLE>
<CAPTION>
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TITLE OF AMOUNT PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT
EACH CLASS OF TO BE OFFERING PRICE AGGREGATE OFFERING OF REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(2) PRICE(2) FEE(2)
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<S> <C> <C> <C> <C>
Common Stock, Par Value $0.01 per share 200,000 $0.51 $544,881 $151.48
================================================================================================================
</TABLE>
<PAGE>
(1) Represents the number of shares of common stock of the Registrant which
may be issued to the shareholders of Video Learning Systems, Inc. ("VLS")
pursuant to the merger described herein.
(2) Each share of common stock of VLS will be converted into the right to
receive a fraction of a share of common stock of the Registrant pursuant
to the merger described herein. Pursuant to Rule 457(f)(2) under the
Securities Act, the registration fee has been calculated based on the book
value of the VLS common stock to be acquired and the maximum number of
shares of VLS common stock to be acquired by the Registrant pursuant to
the merger.
--------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
================================================================================
<PAGE>
VIDEO LEARNING SYSTEMS, INC.
6111 Blue Circle Drive
Minnetonka, Minnesota 55343-9108
(612) 930-1011
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON _______ ___, 1999
TO THE SHAREHOLDERS OF VIDEO LEARNING SYSTEMS, INC.:
NOTICE IS HEREBY GIVEN that a special meeting of the shareholders of
Video Learning Systems, Inc., a Minnesota corporation ("VLS"), will be held on
_______, 1999, at 10:00 a.m., local time, at the offices of Lindquist & Vennum
P.L.L.P. located at 4200 IDS Center, 80 South Eighth Street, Minneapolis,
Minnesota for the following purposes:
1. To consider and vote upon a proposal to adopt and approve the
Agreement and Plan of Merger dated as of July 1, 1999, by and
between Cardia, Inc., a Minnesota corporation, and Video Learning
Systems, Inc., a Minnesota corporation, and to approve the merger
of VLS with and into Cardia pursuant to which the separate
existence of VLS will cease; and
2. To transact such other business as may properly come before the
special meeting or any adjournment or postponement of that
meeting.
Information regarding the merger agreement and the merger and related
matters as well as any other matters to be acted upon at the special meeting is
contained in the attached joint proxy statement/prospectus and its appendices.
THE BOARD OF DIRECTORS OF VLS UNANIMOUSLY RECOMMENDS THAT VLS
SHAREHOLDERS VOTE "FOR" THE ADOPTION OF THE MERGER AGREEMENT AND APPROVAL OF THE
MERGER.
The close of business on September 2, 1999 has been fixed by the board
of directors of VLS as the record date for determination of the shareholders of
VLS entitled to notice of, and to vote at, the special meeting or any
adjournment or postponement thereof. A list of VLS shareholders entitled to vote
at the special meeting will be available for examination during ordinary
business hours at the offices of VLS' legal counsel, Duckson & Carlson, LLC, 10
South Fifth Street, Suite 300, Minneapolis, Minnesota for 10 days prior to the
special meeting.
Whether or not you plan to attend the special meeting, we urge you to
complete, sign and return the enclosed proxy card in the enclosed postage-paid
envelope. You may revoke your proxy at any time before it is voted by delivering
a written notice of such revocation or a duly executed, later-dated proxy to
Video Learning Systems, Inc., 6111 Blue Circle Drive, Minnetonka, Minnesota
55343-9108, Attention: Paul R. Peterson, Secretary, or by attending the special
meeting and voting in person.
By order of the Board of Directors,
Paul R. Peterson, Secretary
Minneapolis, Minnesota
________, 1999
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YOUR VOTE IS IMPORTANT.
PLEASE COMPLETE, SIGN, DATE AND RETURN YOUR PROXY.
HOLDERS OF VLS COMMON STOCK SHOULD NOT
SEND STOCK CERTIFICATES WITH THEIR PROXY CARDS.
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<PAGE>
VIDEO LEARNING SYSTEMS, INC.
6111 BLUE CIRCLE DRIVE
MINNETONKA, MINNESOTA 55343-9108
Dear VLS Shareholder:
You are cordially invited to attend a special meeting of the
shareholders of Video Learning Systems, Inc. on ___________, _______ __, 1999 at
the offices of Lindquist & Vennum P.L.L.P. located at 4200 IDS Center, 80 South
Eighth Street, Minneapolis, Minnesota, at 10:00 a.m., local time. At the special
meeting, you will be asked to vote on a proposal to approve the merger agreement
entered into between VLS and Cardia, Inc. As a result of the transaction, VLS
will merge with and into Cardia whereby the separate legal existence of VLS will
terminate and you will become a shareholder of Cardia.
The merger contemplates a taxable exchange of shares of VLS common
stock for shares of Cardia common stock. Upon the closing of the merger, the
holders of the outstanding shares of VLS common stock will receive a total of
200,000 shares of Cardia common stock. As a result, each outstanding VLS share
will be exchanged for 0.188 of a share of Cardia common stock.
Cardia common stock is not currently traded on any market, although it
is expected to begin trading on the over-the-counter market under the symbol
"CRDI" following the merger. VLS common stock is not traded on any market.
VLS' BOARD OF DIRECTORS BELIEVES THAT THE MERGER IS FAIR TO YOU AND IN
YOUR BEST INTERESTS. THE BOARD HAS UNANIMOUSLY APPROVED THE MERGER AGREEMENT AND
THE MERGER AND RECOMMENDS THAT YOU VOTE TO APPROVE BOTH THE MERGER AGREEMENT AND
THE MERGER.
Because of the significance of the merger, your participation in the
special meeting, either in person or by proxy, is especially important. We hope
you will be able to attend the special meeting. However, even if you anticipate
attending in person, we urge you to mark, sign and return the enclosed proxy
card promptly in the enclosed postage-paid envelope to ensure that your shares
of common stock will be represented at the special meeting. If you do attend,
you will, of course, be able to vote your shares in person.
Thank you. We look forward to seeing you at the special meeting.
Peter R. Peterson
Chairman of the Board and Chief Executive Officer
WE STRONGLY URGE YOU TO READ AND CONSIDER CAREFULLY THIS DOCUMENT IN
ITS ENTIRETY. YOU SHOULD BE AWARE THAT THE MERGER INVOLVES CERTAIN RISKS TO VLS
SHAREHOLDERS, INCLUDING THOSE RISKS IDENTIFIED AS "RISK FACTORS" BEGINNING ON
PAGE 7.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
DOCUMENT IS TRUTHFUL OR COMPLETE. ANY REPRESENTATIONS TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THIS DOCUMENT IS DATED _________, 1999 AND IS FIRST BEING MAILED TO
SHAREHOLDERS ON OR ABOUT __________, 1999.
<PAGE>
TABLE OF CONTENTS
PAGE
----
WHERE YOU CAN FIND MORE INFORMATION............................................1
WHO CAN HELP ANSWER YOUR QUESTIONS.............................................1
SUMMARY........................................................................2
The Companies...............................................................2
The Combined Company........................................................3
Exchange Ratio..............................................................3
Ownership of Cardia Following the Merger....................................3
Reasons for the Merger......................................................3
VLS' Recommendation to You..................................................4
The Special Meeting.........................................................4
Record Date and Voting Power................................................4
Required Vote...............................................................4
Exchange of Stock Certificates..............................................4
Share Ownership of Management and Certain Shareholders......................5
Market Price Information....................................................5
Tax Matters.................................................................5
Dissenters' Rights..........................................................5
Conditions to the Merger....................................................5
Limitation on Discussing or Negotiating Other Transaction Proposals.........6
Termination of the Merger Agreement.........................................6
RISK FACTORS...................................................................7
Risks Relating to the Merger................................................7
Risks Relating to Cardia's Business.........................................8
COMPARATIVE PER SHARE DATA....................................................14
PRO FORMA FINANCIAL INFORMATION...............................................15
THE VLS SPECIAL MEETING.......................................................15
Date, Time and Place of Meeting............................................15
Purpose of the VLS Special Meeting.........................................15
Record Date and Outstanding Shares.........................................16
Voting of Proxies..........................................................16
Vote Required..............................................................16
Quorum; Abstentions; Broker Non-Votes......................................16
Solicitation of Proxies; Expenses..........................................17
Other Matters..............................................................17
APPROVAL OF THE MERGER AND RELATED TRANSACTIONS...............................17
Background of the Merger...................................................17
Reasons for Merger.........................................................18
Recommendation of the VLS Board............................................20
Interests of Certain Persons in the Merger.................................20
Material Federal Income Tax Consequences...................................20
Accounting Treatment of the Merger.........................................22
Expenses...................................................................22
i
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Appraisal Rights...........................................................22
Resale of Cardia Common Stock..............................................25
MATERIAL TERMS OF THE MERGER AGREEMENT........................................26
Structure of the Merger....................................................26
Effective Time of the Merger...............................................26
Merger Consideration.......................................................26
Exchange of Shares.........................................................26
Conditions to the Merger...................................................27
Representations and Warranties.............................................28
Covenants; Conduct of Business Prior to the Merger.........................28
Limitation on Discussing or Negotiating other Transaction Proposals........29
Termination of the Agreement...............................................30
INFORMATION WITH RESPECT TO CARDIA............................................31
Business of Cardia.........................................................31
Market for Cardia's Common Equity and Related Shareholder Matters..........36
Management's Discussion and Analysis of Financial Condition and
Results of Operations....................................................37
Management's Plan of Operation.............................................37
Management.................................................................39
Stock Option Plan and Related Information..................................40
Indemnification and Waiver of Director Liability...........................41
Principal Shareholders.....................................................42
INFORMATION WITH RESPECT TO VLS...............................................44
Business of VLS............................................................44
Market for VLS' Common Equity and Related Shareholder Matters..............44
Management's Discussion and Analysis of Financial Condition and
Results of Operations....................................................44
Principal Shareholders.....................................................46
Executive Compensation and other Matters...................................47
COMPARISON OF RIGHTS OF HOLDERS OF CARDIA COMMON STOCK
AND HOLDERS OF VLS COMMON STOCK.............................................47
Description of Cardia Capital Stock........................................47
Comparative Rights of Cardia and VLS Shareholders..........................48
INDEPENDENT ACCOUNTANTS.......................................................51
LEGAL MATTERS.................................................................51
REPRESENTATIVES OF INDEPENDENT PUBLIC ACCOUNTANTS OF VLS......................51
INDEX TO CARDIA FINANCIAL STATEMENTS.........................................F-1
Report of Independent Accountants.........................................F-2
Balance Sheets as of December 31, 1997 and 1998, and June 30,
1999 (unaudited)........................................................F-3
Statements of Operations for the period ended December 31, 1997,
the year ended December 31, 1998, and the six month periods
ended June 30, 1998 and 1999 (unaudited)................................F-4
Statement of Advances by Parent and Shareholders' Equity for the
period ended December 31, 1997 and the year ended December 31, 1998.....F-5
Statements of Cash Flows for the period ended December 31, 1997,
the year ended December 31, 1998, and the six month periods
ended June 30, 1998 and 1999 (unaudited)................................F-6
Notes to Financial Statements.............................................F-7
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<PAGE>
INDEX TO VLS FINANCIAL STATEMENTS...........................................F-12
Independent Auditors' Report.............................................F-13
Balance Sheets as of December 31, 1997 and 1998, and June 30, 1999
(unaudited)............................................................F-14
Statements of Income for the years ended December 31, 1997 and 1998,
and for the six month period ended June 30, 1999 (unaudited)...........F-15
Statements of Shareholders' Equity for the years ended December 31,
1997 and 1998, and for the period ended June 30, 1999 (unaudited)......F-16
Statements of Cash Flows for the years ended December 31, 1997
and 1998, and for the six month period ended June 30, 1999
(unaudited)............................................................F-17
Notes to Financial Statements............................................F-18
APPENDICES:
Appendix A: Agreement and Plan of Merger Between Cardia, Inc. and
Video Learning Systems, Inc. dated as of July 1, 1999..................A-1
Appendix B: Minnesota Statutes, Section 302A.471 and Section 302A.473....B-1
iii
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
Cardia files annual, quarterly and special reports, proxy statements and
other information with the United States Securities and Exchange Commission. You
may read and copy any document filed by Cardia at the SEC's public reference
facilities. Please call the SEC at 1-800-SEC-0330 for further information about
its public reference facilities. Cardia's SEC filings are also available to the
public at the SEC's website at http: //www.sec.gov. VLS does not file any
reports with the SEC.
WHO CAN HELP ANSWER YOUR QUESTIONS
If you have additional questions about the merger, you should contact:
VIDEO LEARNING SYSTEMS, INC.
6111 Blue Circle Drive
Minnetonka, Minnesota 55343-9108
Attention: Peter R. Peterson
Phone Number (612) 930-1011
CARDIA, INC.
13754 Frontier Court
Burnsville, Minnesota 55337
Attention: Joseph A. Marino
Phone Number: (612) 997-2100
1
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SUMMARY
THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS DOCUMENT AND MAY NOT
CONTAIN ALL OF THE INFORMATION THAT IS IMPORTANT TO YOU. TO UNDERSTAND THE
MERGER FULLY AND FOR A MORE COMPLETE DESCRIPTION OF THE LEGAL TERMS OF THE
MERGER, YOU SHOULD READ CAREFULLY THIS ENTIRE DOCUMENT AND THE OTHER AVAILABLE
INFORMATION REFERRED TO IN "WHERE YOU CAN FIND MORE INFORMATION" ON PAGE 1. THE
MERGER AGREEMENT IS ATTACHED AS APPENDIX A TO THIS DOCUMENT. WE ENCOURAGE YOU TO
READ THE MERGER AGREEMENT. IT IS THE LEGAL DOCUMENT THAT GOVERNS THE MERGER.
WE HAVE INCLUDED PAGE REFERENCES PARENTHETICALLY TO DIRECT YOU TO A MORE
COMPLETE DESCRIPTION OF THE TOPICS AND INFORMATION PRESENTED IN THIS SUMMARY.
CARDIA HAS PROVIDED THE INFORMATION IN THIS DOCUMENT ABOUT CARDIA AND VLS
HAS PROVIDED THE INFORMATION IN THIS DOCUMENT ABOUT VLS.
THE RISK FACTORS BEGINNING ON PAGE 7 SHOULD BE CONSIDERED CAREFULLY BY THE
VLS SHAREHOLDERS IN EVALUATING WHETHER TO ADOPT THE MERGER AGREEMENT AND APPROVE
THE MERGER. THESE FACTORS SHOULD ALSO BE CONSIDERED IN CONJUNCTION WITH
FORWARD-LOOKING STATEMENTS MADE IN THIS DOCUMENT OR IN ANY OTHER INFORMATION OR
DOCUMENT INCLUDED OR INCORPORATED BY REFERENCE HEREIN.
THE COMPANIES
Cardia, Inc. (SEE PAGE 31)
13754 Frontier Court
Burnsville, Minnesota 55337
(612) 997-2100
Cardia, Inc. was formed in October of 1998 as a subsidiary of Applied
Biometrics, Inc. It was spun off to the shareholders of Applied Biometrics in a
distribution on February 11, 1999. Cardia is developing, manufacturing and
marketing transcatheter closure device products for the repair of certain
cardiac defects.
Transcatheter closure devices are a new family of small, implantable
devices which are delivered through a catheter inserted into a major blood
vessel to permanently repair certain cardiac defects. The procedure is performed
in a cardiac catheterization laboratory and is intended to reduce the need for
open heart surgery. Cardia is in the initial stages of developing these closure
devices. Cardia believes its closure devices offer certain advantages over
transcatheter closure devices offered by its competitors.
Cardia is currently marketing and selling a device for the closure of a
pediatric cardiac defect known as patent ductus arteriosus on an experimental
basis in Europe only. This defect is an abnormal passage between two major blood
vessels of the heart and is generally corrected in children. Cardia is also
currently focusing significant development and regulatory approval efforts on a
closure device for the correction of another cardiac defect known as patent
foramen ovale. The foramen ovale defect is an abnormal passage between the right
and left chambers of the heart and is generally corrected in adults.
The pediatric product variant has already been sold in Germany as an
experimental device. That product has been implanted successfully in over 150
human cases on an experimental basis. Cardia expects to complete enhancements to
its adult device in the near future and has begun selling and distributing the
adult device on an experimental basis in Europe while pursuing certain
regulatory approvals.
2
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Video Learning Systems, Inc. (SEE PAGE 44)
6111 Blue Circle Drive
Minnetonka, Minnesota 55343-9108
(612) 930-1011
Video Learning Systems, Inc. was incorporated as a Minnesota corporation on
December 7, 1982. From 1982 to 1989, VLS was engaged in the development,
production, manufacturing and marketing of "self-help" and "how-to" video tapes
covering a variety of topics for the home video market. VLS focused its initial
efforts on researching the video market and then became a co-producer for a
number of video tapes, including exercise and training tapes and tapes for
teaching preschool children. VLS ceased operations in approximately 1989 and has
not engaged in any active operations since that time.
VLS currently has no active business or significant assets other than cash,
cash equivalents and a note receivable. The company's only income during the
last four fiscal years was attributable to certain interest and dividend income.
VLS has no employees, facilities or operations of any kind.
It is expected that Peter R. Peterson, a director and officer of VLS, will
be elected to the board of directors of Cardia upon the completion of the
merger. No other director, officer, employee or member of VLS' management will
be a director or part of the management organization of Cardia.
THE COMBINED COMPANY
The combined company will carry on the current business of Cardia. Cardia
will not change its operations or strategies following the merger.
EXCHANGE RATIO (SEE PAGE 26)
VLS shareholders will receive 0.188 of a share of Cardia common stock for
each share of VLS common stock owned immediately prior to the closing of the
merger.
OWNERSHIP OF CARDIA FOLLOWING THE MERGER (SEE PAGE 26)
VLS shareholders will receive a total of 200,000 shares of Cardia common
stock in the merger. Based on the number of shares of Cardia common stock
outstanding on June 30, 1999, existing VLS shareholders will own approximately
16.7% of the outstanding Cardia common stock after the merger.
REASONS FOR THE MERGER (SEE PAGE 18)
CARDIA. A special committee of the board of directors of Cardia approved
the merger based on a number of factors including, among other things, the
following:
* the merger is an efficient way for Cardia to acquire cash necessary
for the company to pursue its business plans and strategies for
growth;
* the merger will enable Cardia to obtain the services of Peter R.
Peterson as a member of its board of directors; and
* the merger will provide an efficient way for Cardia to expand the
ownership and interest in the company and its business.
3
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VLS. The board of directors of VLS believes that the merger should result
in a number of benefits to VLS shareholders, including, among other benefits,
the following:
* the merger will provide holders of VLS common stock with an
opportunity to obtain increased value through the potential growth of
an operating business, as compared to VLS which has not engaged in any
significant operational activity for approximately ten years;
* the merger will afford holders of VLS common stock with the
opportunity to own stock in an active business enterprise and
potentially participate in a market for their shares which is not
currently available to shareholders of VLS; and
* the merger will offer holders of VLS common stock a greater
diversification of risk by an investment in Cardia instead of VLS.
VLS' RECOMMENDATION TO YOU (SEE PAGE 20)
The VLS board of directors believes that the merger is fair to you and in
your best interests. The VLS board of directors unanimously recommends that you
vote "For" the adoption of the merger agreement and approval of the merger.
THE SPECIAL MEETING (SEE PAGE 15)
A special meeting of the shareholders of VLS will be held on _______, 1999,
at the offices of Lindquist & Vennum P.L.L.P. located at 4200 IDS Center, 80
South Eighth Street, Minneapolis, Minnesota at 10:00 a.m. local time to adopt
the merger agreement and to consider and vote upon a proposal to approve the
merger.
RECORD DATE AND VOTING POWER (SEE PAGE 16)
You are entitled to vote at the special meeting if you owned shares of VLS
common stock on the close of business on September 2, 1999, the record date for
the special meeting. You will have one vote at the special meeting for each
share of VLS common stock you owned on the record date. There are 1,063,750
shares of VLS common stock entitled to be voted at the special meeting.
REQUIRED VOTE (SEE PAGE 16)
The adoption of the merger agreement and approval of the merger requires
the affirmative vote of a majority of the shares of VLS common stock outstanding
on the record date.
EXCHANGE OF STOCK CERTIFICATES
If you are a VLS shareholder, you should not send in your stock
certificates now. After the merger is completed, Cardia will send VLS
shareholders written instructions for receiving shares of Cardia common stock in
exchange for their stock certificates. Cardia shareholders will keep their
current certificates, and will continue to hold the same number of shares of
Cardia common stock after the merger.
4
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SHARE OWNERSHIP OF MANAGEMENT AND CERTAIN SHAREHOLDERS (SEE PAGE 46)
The directors and executive officers of VLS own approximately 21.1% of the
shares entitled to vote at the special meeting. All of them have agreed to vote
their shares for the adoption of the merger agreement and approval of the
merger.
MARKET PRICE INFORMATION (SEE PAGE 36)
Cardia common stock is not traded on any exchange or market, although a
market is expected to develop after the merger closes. VLS common stock is not
traded on any exchange or market.
TAX MATTERS (SEE PAGE 20)
The merger will be a taxable event and result in a taxable gain to most of
you. In other words, the exchange of shares of VLS common stock for shares of
Cardia common stock in the merger will be taxable to you for federal income tax
purposes. Your tax basis in the shares of Cardia common stock that you will
receive in the merger will equal the sum of your current tax basis in your VLS
common stock and any gain you realize as a result of the exchange of shares in
the merger. The management of Cardia does not believe that the merger will
create a tax obligation for Cardia.
TAX MATTERS CAN BE COMPLICATED, AND THE TAX CONSEQUENCES OF THE MERGER TO
YOU WILL DEPEND ON THE FACTS OF YOUR OWN SITUATION. YOU SHOULD CONSULT YOUR OWN
TAX ADVISORS TO FULLY UNDERSTAND THE TAX CONSEQUENCES OF THE MERGER TO YOU.
DISSENTERS' RIGHTS (SEE PAGE 22)
VLS is organized under Minnesota law. Under Minnesota law, shareholders of
VLS have a right, under certain conditions, to an appraisal of the value of
their shares in connection with the merger. These dissenters' rights are set
forth in Sections 302A.471 and 302A.473 of the Minnesota Business Corporation
Act, copies of which are attached to this document as Appendix B.
YOU SHOULD BE AWARE THAT A FAILURE TO FOLLOW THE STEPS REQUIRED BY SECTIONS
302A.471 AND 302A.473 OF THE MINNESOTA BUSINESS CORPORATION ACT FOR PERFECTING
DISSENTERS' RIGHTS MAY RESULT IN THE LOSS OF THOSE RIGHTS.
CONDITIONS TO THE MERGER (SEE PAGE 27)
Cardia and VLS will not complete the merger unless several conditions are
satisfied or, in some cases, waived, including the following:
* adoption of the merger agreement and approval of the merger by the VLS
shareholders;
* receipt of all material approvals and consents of third parties
necessary to consummate the merger;
* the registration statement of which this document is a part being
declared effective under the Securities Act of 1933;
5
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<PAGE>
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* receipt of all permits and authorizations required by applicable state
securities laws for Cardia common stock to be issued in connection
with the merger;
* compliance by Cardia and VLS with their obligations under the merger
agreement and the representations and warranties made by Cardia and
VLS, respectively, in the merger agreement being true; and
* delivery by counsel for each company of its legal opinion to the other
company.
LIMITATION ON DISCUSSING OR NEGOTIATING OTHER TRANSACTION PROPOSALS (SEE PAGE
29)
VLS has agreed not to pursue a business combination or other significant
transaction with another party while the merger is pending, unless such party
has made a proposal to the VLS board of directors for a superior transaction
with VLS.
TERMINATION OF THE MERGER AGREEMENT (SEE PAGE 30)
Cardia and VLS can agree by mutual written consent to terminate the merger
agreement at any time, whether before or after the receipt of shareholder
approval. In addition, either company can terminate the merger agreement if
certain events occur, including the following:
* the shareholders of VLS do not vote to approve the merger and adopt
the merger agreement;
* either party materially breaches its representations, warranties,
covenants or agreements set forth in the merger agreement and fails to
exercise commercially reasonable efforts to cure such breach; or
* the VLS board of directors breaches its obligation not to pursue an
alternative business transaction, recommends, approves or authorizes
the acceptance or execution of a letter of intent or definitive
agreement providing for an alternative transaction to the merger,
withdraws or modifies, in a manner materially adverse to Cardia, its
recommendation to its shareholders to approve the merger, or fails to
recommend against acceptance of a tender or exchange offer or takes no
position with respect to such offer within ten days after such offer
is made.
6
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<PAGE>
RISK FACTORS
THIS DOCUMENT CONTAINS FORWARD-LOOKING STATEMENTS. THESE STATEMENTS
RELATE TO FUTURE EVENTS OR THE FUTURE FINANCIAL PERFORMANCE OF CARDIA AND VLS.
IN SOME CASES, YOU CAN IDENTIFY FORWARD-LOOKING STATEMENTS BY TERMINOLOGY SUCH
AS "MAY," "WILL," "SHOULD," "EXPECTS," "PLANS," "ANTICIPATES," "BELIEVES,"
"FUTURE," "INTENDS," "ESTIMATES," "PREDICTS," "POTENTIAL," OR "CONTINUE" OR THE
NEGATIVE OF SUCH TERMS AND OTHER COMPARABLE TERMINOLOGY. THESE STATEMENTS ONLY
REFLECT MANAGEMENT'S EXPECTATIONS AND ESTIMATES. ACTUAL EVENTS OR RESULTS MAY
DIFFER MATERIALLY FROM THOSE PROJECTED IN THE FORWARD-LOOKING STATEMENTS AS A
RESULT OF COMPETITION, TECHNOLOGICAL CHANGE, GENERAL ECONOMIC CONDITIONS AND THE
RISKS OUTLINED BELOW. THESE FACTORS MAY CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM ANY FORWARD-LOOKING STATEMENTS.
WE ARE NOT UNDERTAKING ANY OBLIGATIONS TO UPDATE ANY FORWARD-LOOKING
STATEMENTS CONTAINED IN THIS DOCUMENT TO REFLECT ANY FUTURE EVENTS OR
DEVELOPMENTS.
THE FOLLOWING FACTORS SHOULD BE CONSIDERED CAREFULLY BY VLS
SHAREHOLDERS IN EVALUATING WHETHER TO ADOPT THE MERGER AGREEMENT AND APPROVE THE
MERGER. SEE ALSO "WHERE YOU CAN FIND MORE INFORMATION" ON PAGE 1.
RISKS RELATING TO THE MERGER
THE COSTS OF COMPLETING THE MERGER Cardia and VLS estimate that they will
ARE SUBSTANTIAL AND MAY ADVERSELY incur aggregate, direct transaction costs
AFFECT CARDIA'S RESULTS OF of approximately $50,000 associated with
OPERATIONS the merger, which will be charged to
operations in the quarter in which the
merger is consummated. This estimate
primarily includes fees for attorneys,
accountants, financial printing and other
related charges.
HOLDERS OF VLS COMMON STOCK WILL Following the merger, holders of VLS
HAVE DIFFERENT RIGHTS AS HOLDERS common stock will become OF holders of
CARDIA COMMON STOCK FOLLOWING THE Cardia common stock. Certain differences
MERGER exist between the rights of VLS
shareholders under VLS' articles of
incorporation and VLS' bylaws, and the
rights of Cardia shareholders under
Cardia's articles of incorporation and
Cardia's bylaws. See "Comparative Rights
of Cardia and VLS Shareholders" on page
48.
THE MERGER IS TAXABLE The merger will be taxable. This means
that, depending on your current tax basis
in the shares of VLS common stock that you
own, you may recognize a taxable gain or
loss in connection with the shares of
Cardia common stock and cash in lieu of
fractional shares, if any, you receive in
the merger. Your gain or loss will be
based on the difference between your basis
in your VLS shares and the fair market
value of the Cardia common stock you
receive in exchange for those shares.
Cardia has determined that the fair market
value of its common stock is $1.00. That
determination is, however, subject to
challenge by the Internal Revenue Service,
which could result in an increase in the
gain, or a decrease in the loss, you will
recognize. See "Material Federal Income
Tax Consequences" on page 20.
7
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THE SECURITIES YOU RECEIVE IN THE The net book value of your VLS shares as
MERGER MAY NOT HAVE A VALUE EQUAL of June 30, 1999 was approximately $0.51
TO OR GREATER THAN THE VALUE OF per share. See "Comparative Per Share Data
YOUR VLS SHARES - VLS" on pages 14-15. Although net book
value is not necessarily the amount you
would receive if VLS were liquidated, it
is one approximation of the value of your
shares. In the merger, you will exchange
5.32 shares of VLS common stock for one
share of Cardia common stock. Cardia's
common stock does not currently trade on
any market and, therefore, it is not
possible to determine the exact fair
market value of a share of Cardia common
stock. A special committee of Cardia's
board of directors has, however,
determined that the fair market value of a
share of Cardia's common stock is $1.00
per share, based on recent sales of
Cardia's common stock. See "Material
Federal Income Tax Consequences" on pages
20-21. A market for Cardia's common stock
may develop after consummation of the
merger on the over-the-counter market.
The trading price for Cardia's common
stock in that market may be at, above or
below $1.00 per share.
RISKS RELATING TO CARDIA'S BUSINESS
CARDIA IS AN EARLY STAGE IMPLANTABLE Cardia is an implantable medical device
MEDICAL DEVICE COMPANY AND DOES NOT company in an early stage of development.
HAVE AN OPERATING HISTORY ON WHICH This is particularly significant because
TO EVALUATE CARDIA'S BUSINESS AND the implantable medical device industry is
PROSPECTS a market in which there is an increasing
number of companies, intense competition,
and a high failure rate. Cardia has no
significant operating history which you
may use to evaluate its business and
prospects. Cardia's prospects must be
considered in light of the risks,
difficulties and uncertainties frequently
encountered by implantable medical device
companies in an early stage of
development. There can be no assurance
that Cardia will be able to complete its
products under development, that those
products will be approved for marketing,
that those products will be accepted in
the marketplace, or that those products
can be sold at a profit. Consequently, an
investment in Cardia common stock is
highly speculative. Cardia does not
guarantee any return on an investment in
its common stock.
THERE IS NO ESTABLISHED MARKET FOR The closure devices Cardia is currently
CARDIA'S PRODUCTS developing are completely new methods of
treating cardiac defects and have not been
widely tested. Open heart surgery has been
the standard treatment for these defects
for many years. Cardia cannot assure you
that it will be able to establish a market
for its closure devices under development
or that the market will be significant. If
Cardia is not able to establish a
significant market, it may not become
profitable.
8
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NON-COMPLIANCE WITH THE EXTENSIVE In the United States, Cardia's closure
REGULATIONS IMPOSED BY THE UNITED devices are considered to be implantable
STATES FOOD AND DRUG medical devices, and they will require
ADMINISTRATION COULD HAVE A clearance or approval by the United States
SIGNIFICANT NEGATIVE IMPACT ON Food and Drug Administration before
CARDIA'S BUSINESS commercial sales can be made in the United
States. The FDA also imposes
post-marketing controls on Cardia and its
products. If Cardia fails to meet these
extensive FDA requirements, Cardia and its
employees could be exposed to significant
restrictions and penalties. Failure to
meet FDA requirements could also cause
Cardia to experience reduced revenues and
possible losses.
EXPORT AND IMPORT REGULATIONS If Cardia sells its medical devices
COULD DELAY OR INHIBIT CARDIA'S outside the United States or Europe, it
ABILITY TO SELL ITS PRODUCTS IN will be subject to United States export
FOREIGN COUNTRIES requirements and foreign regulatory
requirements. Each country, other than
members of the European Union, has
different legal restrictions on the sale
of imported medical devices. These
restrictions may expose Cardia to
requirements and time frames that are very
different from those applicable in the
United States and Europe. Cardia cannot
guarantee that it will be able to obtain
regulatory approvals or clearances for the
sale of its products under development in
foreign countries.
CARDIA HAS A HISTORY OF OPERATING Prior to its spin off in early 1999 from
LOSSES Applied Biometrics, Inc., Cardia's
business incurred a net operating loss of
$457,866 in fiscal year 1997 and a net
operating loss of $836,386 in fiscal year
1998. Through June 30, 1999 and under its
separate administration of the business,
Cardia has incurred a net loss of
$226,753. As of June 30, 1999, Cardia's
accumulated deficit was $1,521,007. Its
losses have resulted principally from
expenses incurred in research and
development and general, selling and
administrative expenses. Cardia has had
only limited revenues to date.
CARDIA'S FUTURE PROFITABILITY IS Cardia has generated minimal revenues from
UNCERTAIN the sale of its products under development
and Cardia can not guarantee that it will
be able to generate significant revenues
in the future. Cardia expects its
operating losses to continue for the near
future as the company's research and
development, sales and marketing
activities, and operations continue.
Cardia's ability to achieve profitability
depends upon its ability to obtain
necessary government approvals, develop
its sales and marketing capacity, and
successfully market and sell its products,
none of which can be assured. It is
uncertain when Cardia will become
profitable. See "Information with Respect
to Cardia - Business of Cardia" on page
31.
9
<PAGE>
INSURANCE REIMBURSEMENT FOR Cardia's ability to successfully
CARDIA'S PRODUCTS IS UNCERTAIN commercialize the products it has under
development depends in part on obtaining
adequate reimbursement for such products
from government and private health care
insurers (including health maintenance
organizations and other third-party
payors). Physicians' decisions to
recommend products such as Cardia's are
likely to be heavily influenced by the
scope and extent of reimbursement for such
products by third-party payors. Government
and private third-party payors are
increasingly attempting to contain health
care costs by limiting both the extent of
coverage and the reimbursement rate for
new treatment products. In particular,
services which are determined to be
investigational in nature or which are not
considered "reasonable and necessary" for
treatment may be denied reimbursement
coverage. If adequate reimbursement
coverage is not available from insurers or
third-party payors, it is uncertain
whether individuals will elect to directly
pay for Cardia's products under
development. If insurers or third-party
payors and individuals are unwilling to
pay for Cardia's products under
development, then the company's potential
revenue and earnings will be significantly
decreased or eliminated.
CARDIA'S ABILITY TO PROTECT ITS Cardia's success will partly depend on its
PROPRIETARY TECHNOLOGY IS UNCERTAIN ability to obtain patent protection for
its products in the United States and in
other countries. In addition, the success
of Cardia will also depend on its ability
to preserve its trade secrets and to
operate without infringing the proprietary
rights of third parties. There can be no
assurance that Cardia's patent
applications will ever be issued as
patents or that the claims of any issued
patents will afford meaningful protection
for its technology or products under
development. Furthermore, others may
develop similar products which avoid
infringing upon, or conflicting with,
Cardia's patents or patent applications.
In addition, there can be no assurance
that any patents issued to Cardia will not
be challenged and subsequently narrowed,
invalidated or circumvented. See
"Information with Respect to Cardia -
Business - Patents, Trademarks and
Proprietary Rights" on page 35.
Cardia also relies on unpatented
proprietary technologies. Cardia relies on
confidentiality agreements with its
employees and consultants to protect such
proprietary technologies. There can be no
assurance that Cardia can adequately
protect its rights to such unpatented
proprietary technologies, that others will
not independently develop substantially
equivalent proprietary information or
techniques, or otherwise gain access to
Cardia's proprietary technologies or
disclose such technologies. See
"Information with Respect to Cardia -
Business - Patents, Trademarks and
Proprietary Rights" on page 35.
10
<PAGE>
CARDIA'S PATENTS MAY CONFLICT WITH Cardia's products under development may
PATENTS GRANTED TO OTHER PARTIES also conflict with patents which have been
or may be granted to others. As the
medical device industry expands and more
patents are filed and issued, the risk
increases that Cardia's products under
development may give rise to a declaration
of interference by the Patent and
Trademark Office, or to claims of patent
infringement by other companies,
institutions, or individuals. Such
entities or persons could bring legal
proceedings against Cardia seeking damages
or seeking to enjoin Cardia from testing,
manufacturing or marketing its products
under development. Patent litigation is
costly, and even if Cardia prevails, the
cost of such litigation could have an
adverse effect on the company. If the
other parties in any such actions are
successful, in addition to any liability
for damages, Cardia could be required to
cease the infringing activity or obtain a
license. Such a license may not be
available to Cardia on acceptable terms,
if at all. If Cardia fails to obtain a
license to any technology that it requires
to commercialize its products under
development, the company would experience
a material adverse effect on its business,
financial condition, potential revenues
and earnings.
TECHNOLOGICAL CHANGES MAY RESULT IN Market acceptance and sales of Cardia's
OBSOLESCENCE OF CARDIA'S PRODUCTS products under development may also be
adversely affected by technological
change. It is uncertain whether Cardia's
competitors will succeed in developing
products that are less expensive or more
effective than the company's products
under development. Further, it is
uncertain whether such developments may
render Cardia's technology or products
under development less competitive or
obsolete.
CARDIA HAS LIMITED MARKETING AND Cardia currently has a very limited sales
SALES EXPERIENCE and marketing organization. Cardia is in
the process of developing additional sales
and marketing resources. Cardia can not
guarantee, however, that it will be able
to build a direct sales force or marketing
organization, that, if established, such
organization will be cost effective, or
that the company's sales and marketing
efforts will be successful. Cardia also
can not guarantee that it will be able to
enter into agreements with distributors or
collaborative arrangements on a timely
basis or at all. Cardia also can not
guarantee that distributors or
collaborators will devote adequate
resources to selling the company's
products under development. If Cardia
fails to build an effective sales and
marketing organization or to establish
effective distribution or collaborative
relationships, the company will experience
a material adverse effect on its business,
financial condition, and potential
revenues and earnings.
11
<PAGE>
CARDIA HAS LIMITED MANUFACTURING Cardia must manufacture its products under
EXPERIENCE development in accordance with regulatory
requirements, in commercial quantities, at
appropriate quality levels and at
acceptable costs if it is to be
successful. Cardia has not yet been
required to produce its closure devices in
large quantities at competitive costs.
There can be no assurance that the company
will be able to do so. If Cardia receives
governmental approval to widely market its
closure devices, there can be no assurance
that the company will be successful in
making the transition to commercial
production of these products.
CARDIA HAS SIGNIFICANT PRODUCT Cardia's business exposes the company to
LIABILITY EXPOSURE significant potential liability risks
inherent in the use of implantable medical
devices. Cardia does not know whether
liability claims will be asserted against
it. Cardia does have product liability
insurance which it believes provides
coverage for the application and use of
its products under development. It is
uncertain, however, whether the company
will be able to maintain such insurance on
acceptable terms or that such insurance
coverage will be in a sufficient amount.
Any insurance obtained may not provide
adequate coverage against potential
liabilities. A liability claim, even one
without merit, could result in significant
legal defense costs which would increase
Cardia's expenses, lower its potential
earnings and even result in losses.
CARDIA DEPENDS ON KEY PERSONNEL Because of the specialized scientific
nature of Cardia's business, Cardia is
highly dependent upon its ability to
attract and retain qualified management,
scientific and technical personnel. Cardia
will also depend on its ability to hire
qualified marketing and sales personnel.
Competition for scientific, marketing and
sales personnel is intense. A loss of the
services of Joseph A. Marino, Chairman and
Chief Executive Officer of Cardia, could
adversely affect the operation of the
company and its research and development
programs, and could impede the achievement
of the company's business objectives.
Cardia does not currently maintain key-man
life insurance on any of its personnel.
There can be no assurance that the company
will be successful in hiring or retaining
qualified personnel. The loss of key
personnel, or the company's inability to
hire and retain qualified personnel, could
have a material adverse effect on Cardia's
business, financial condition, and
potential revenues and earnings.
THERE IS NO CURRENT PUBLIC MARKET To date, there has been no public market
FOR CARDIA'S COMMON STOCK for Cardia's common stock. While Cardia
has agreed to use commercially reasonable
efforts to cause the company's common
stock to be approved for trading on the
local over-the-counter market, there can
be no assurance that an active trading
market for Cardia common stock will
develop or be sustained. See "Market for
Cardia's Common Equity and Related
Shareholder Matters - Market Information"
on page 36.
12
<PAGE>
IT IS POSSIBLE THAT CARDIA'S COMMON The stock market has, from time to time,
STOCK PRICE WILL BE VOLATILE experienced extreme price and volume
fluctuations which have particularly
affected the market prices for emerging
medical device companies and which have
often been unrelated to the operating
performance of such companies. These broad
market fluctuations may adversely affect
the market price of Cardia's common stock;
if a market develops. Following periods of
volatility in the market price of a
company's stock, securities class action
litigation has sometimes occurred against
the issuing company. Such litigation could
result in substantial costs and a
diversion of management's attention and
resources, which could have a material
adverse affect on Cardia's potential
revenues and earnings. Any adverse
determination in such litigation could
also subject Cardia to significant
liabilities.
CARDIA IS SUBJECT TO ANTI-TAKEOVER The effect of certain provisions of the
LAWS; CERTAIN PROVISIONS OF CARDIA'S Minnesota Business Corporation Act and the
ARTICLES OF INCORPORATION MAY HAVE ability of the company's board of
AN ANTI-TAKEOVER EFFECT directors to issue preferred stock without
shareholder approval may have the effect
of delaying or preventing a change in
control or merger of Cardia which could
operate to the detriment of its
shareholders. See "Description of Cardia
Capital Stock - Cardia Preferred Stock
and - Business Combinations and Control
Share Acquisitions" on pages 48 and 50,
respectively.
13
<PAGE>
COMPARATIVE PER SHARE DATA
Set forth below are the net income and book value per common share data
for Cardia and VLS on a historical basis and for Cardia on a combined pro forma
basis, and certain equivalent pro forma per share data for VLS. The Cardia
combined pro forma data was derived by combining historical financial
information of Cardia and VLS. The equivalent combined pro forma per share data
for VLS was calculated by multiplying the Cardia pro forma per common share data
by the exchange ratio of 0.188.
The information in the table below should be read in conjunction with
the respective audited and unaudited financial statements and related notes of
Cardia and VLS included elsewhere in this document.
CARDIA
Six Months
Year Ended Ended
December 31, 1998 June 30,1999
----------------- ------------
HISTORICAL PER COMMON SHARE DATA:(1)
Income (loss) from continuing operations
Basic $(2.23) $(.33)
Diluted $(2.23) $(.33)
Book Value $ 0.54 $ 1.19
COMBINED PRO FORMA PER COMMON
SHARE DATA:(2)
Income (loss) from continuing operations
Basic $(1.41) $(.25)
Diluted $(1.41) $(.25)
Book Value $ 1.29 $ 1.54
- ---------------------
(1) The weighted average number of shares of Cardia common stock used in
calculating the historical per common share data for Cardia was 375,000 at
December 31, 1998 and 690,613 at June 30, 1999.
(2) The weighted average number of shares of Cardia common stock, including
shares to be issued in the merger, used in calculating combined pro forma
per common share data was 574,985 at December 31, 1998 and 890,598 at June
30, 1999.
14
<PAGE>
VLS
Six Months
Year Ended Ended
December 31, 1998 June 30, 1999
----------------- -------------
HISTORICAL PER COMMON SHARE DATA:
Income (loss) from continuing operations
Basic $0 $0
Diluted $0 $0
Book Value $.50 $.51
EQUIVALENT COMBINED PRO FORMA PER COMMON
SHARE DATA:
Income (loss) from continuing operations
Basic $(.27) $(.05)
Diluted $(.27) $(.05)
Book Value $ .24 $ .29
PRO FORMA FINANCIAL INFORMATION
VLS has not conducted an active business since 1989. Its net assets
primarily consist of cash and a note receivable totaling $544,881 at June 30,
1999, which will be included on the balance sheet of Cardia following the merger
less approximately $50,000 of transaction costs. VLS has not generated operating
income since it ceased active business operations. Its only income has been in
the form of interest and dividend income which totaled $33,667 and $14,898 for
the year ended December 31, 1998 and the six-month period ended June 30, 1999,
respectively. This source of income will now be included in Cardia's income
statements in future periods to the extent these assets continue to be held in
their current form. VLS has historically incurred selling, general and
administrative expenses. Those expenses will be eliminated following the merger.
A detailed presentation of the pro forma effects of the merger is not
included in this document because a limited number of pro forma adjustments are
required, as discussed above, and those adjustments are easily determinable and
calculable based on a review of the financial information regarding Cardia and
VLS presented in this document.
THE VLS SPECIAL MEETING
DATE, TIME AND PLACE OF MEETING
The VLS special meeting will be held at the offices of Lindquist &
Vennum P.L.L.P. located at 4200 IDS Center, 80 South Eighth Street, Minneapolis,
Minnesota, on _________________, 1999 at 10:00 a.m. local time.
PURPOSE OF THE VLS SPECIAL MEETING
The purpose of the VLS special meeting is to approve and adopt the
merger agreement and the merger. VLS shareholders may also consider and vote on
such other matters as may properly come before the VLS special meeting or any
adjournments or postponements of the meeting.
15
<PAGE>
RECORD DATE AND OUTSTANDING SHARES
The VLS board of directors has fixed September 2, 1999 as the record
date for the VLS special meeting. Only shareholders of record of VLS common
stock on the record date are entitled to notice of, and to vote at, the VLS
special meeting. As of the record date, there were 73 shareholders of record
holding an aggregate of 1,063,750 shares of VLS common stock. Except for the
shareholders identified under "VLS Principal Shareholders" on page 46, to the
knowledge of VLS, no other person beneficially owned more than 5% of the
outstanding VLS common stock as of the record date.
This document was mailed to all VLS shareholders of record as of the
record date and constitutes notice of the VLS special meeting in conformity with
the requirements of the Minnesota Business Corporation Act.
VOTING OF PROXIES
All properly executed proxies that are not revoked will be voted at the
VLS special meeting in accordance with the instructions contained in the proxy.
If a shareholder signs and returns a proxy without indicating any voting
instructions, the shares of VLS common stock that the proxy represents will be
voted "FOR" the proposal to adopt and approve the merger agreement and approve
the merger under the recommendation of the VLS board of directors or "FOR"
adjournment or postponement of the VLS special meeting if an adjournment or
postponement, in the discretion of the proxy holders, is determined to be
necessary or desirable. A shareholder who has executed and returned a proxy may
revoke it at any time before it is voted at the VLS special meeting by:
(1) executing and returning a proxy bearing a later date;
(2) filing written notice of such revocation with the corporate
secretary of VLS stating that the proxy is being revoked; or
(3) attending the VLS special meeting and voting in person.
All written notices of revocation and other communications with respect
to revocation of VLS proxies should be sent to: Video Learning Systems, Inc.,
6111 Blue Circle Drive, Minnetonka, Minnesota, MN 55343-9108, Attention:
Secretary. Attendance at the VLS special meeting, in and of itself, will not
constitute a revocation of a proxy.
VOTE REQUIRED
Adoption and approval of the merger agreement and approval of the
merger require the affirmative vote of holders of a majority of the shares of
VLS common stock outstanding as of the record date. Each shareholder of record
of VLS common stock on the record date is entitled to cast one vote per share,
exercisable in person or by properly executed proxy, on each matter properly
submitted for the vote of the shareholders of VLS at the VLS special meeting.
At the record date for the special meeting, the directors and executive
officers of VLS owned approximately 21.1% of the outstanding shares of VLS
common stock entitled to vote at such meeting. All of them have agreed to vote
their shares for the adoption of the merger agreement and approval of the
merger.
QUORUM; ABSTENTIONS; BROKER NON-VOTES
The presence, in person or by properly executed proxy, of the holders
of a majority of the outstanding shares of VLS common stock entitled to vote at
the VLS special meeting is necessary to constitute a quorum. Abstentions will be
counted for purposes of determining a quorum, but will have the effect of a vote
against
16
<PAGE>
approval of the matters being voted upon. If a broker holding shares in street
name returns an executed proxy that indicates that the broker does not have
discretionary authority as to those shares to vote on one or more matters, those
shares will be considered represented at the VLS special meeting for purposes of
determining a quorum, but will have the effect of a vote against approval of the
matters being voted upon.
SOLICITATION OF PROXIES; EXPENSES
VLS will bear the cost of the solicitation of proxies and all related
costs. In addition, VLS may reimburse brokerage firms and other persons
representing beneficial owners of shares for their expenses in forwarding
solicitation materials to such beneficial owners. Certain directors, officers or
other employees of VLS may supplement original solicitation of proxies by mail
with telephone, facsimile or personal solicitation, without payment of
additional compensation.
OTHER MATTERS
At the date of this document, the VLS board of directors does not know
of any business to be presented at the special meeting other than as set forth
in the notice accompanying this document. If any other matters should properly
come before the special meeting, it is intended that the shares represented by
proxies will be voted with respect to such matters in accordance with the
judgment of the persons voting such proxies.
APPROVAL OF THE MERGER AND RELATED TRANSACTIONS
BACKGROUND OF THE MERGER
The terms and conditions of the merger agreement and the merger are the
result of arms' length negotiations between representatives of Cardia and
representatives of VLS. A summary of those negotiations follows:
VLS has not engaged in an active business operation since 1989. The
management of the company has explored and evaluated a number of potential
opportunities for its business and assets since that time, including a number of
acquisition opportunities. VLS management has also considered engaging in a new
line of business and the merits of liquidating its assets and distributing the
proceeds to the company's shareholders. Peter R. Peterson, the Chief Executive
Officer of VLS, believed that a merger would give VLS' shareholders an
opportunity to participate in an active business enterprise and provide a
mechanism for maximizing shareholder value. In May of 1999, Mr. Peterson
contacted Joseph A. Marino, the Chief Executive Officer of Cardia, and proposed
a merger transaction between VLS and Cardia. Mr. Marino expressed interest in
the proposal, but no agreement on terms of a merger was reached during this
discussion.
During subsequent meetings and negotiations between Mr. Marino and Mr.
Peterson in May and June of 1999, Mr. Marino proposed a merger which would
result in VLS shareholders owning approximately 17% of the resulting company.
Mr. Marino's proposal was based on his evaluation of the present value of the
assets of VLS, which consisted of cash, cash equivalents, and a note receivable,
which he estimated to be substantially less than the nominal per share book
value of the company of approximately $.51 per share. Mr. Marino's proposal also
took into account the expense and time required to negotiate and consummate a
merger transaction that would require the filing of a registration statement
with the Securities and Exchange Commission and the involvement of legal counsel
and independent accountants on behalf of both Cardia and VLS. After considering
Mr. Marino's proposal, Mr. Peterson indicated that it was acceptable to VLS
management and that he would present the proposal to the VLS board of directors
and, if the VLS board approved the transaction, the company would then submit
the proposal to the VLS shareholders.
17
<PAGE>
Mr. Marino presented the transaction as discussed between himself and
Mr. Peterson to a special committee of the Cardia board of directors in June of
1999. After consideration of the present value of the assets of VLS, the
determined fair value of the Cardia common stock, the number of shares to be
issued to VLS shareholders, the pro forma financial impact of the transaction
and the estimated cost and time to complete the transaction, and other benefits
and risks associated with the proposed transaction, the special committee of the
Cardia board of directors unanimously approved the transaction.
Mr. Peterson presented the transaction as discussed between himself and
Mr. Marino to the VLS board of directors in June of 1999. After consideration of
the liquidation value of VLS, the number of shares of Cardia common stock to be
received by VLS shareholders, the business and prospects of Cardia, the pro
forma financial condition of the combined companies and other benefits and risks
associated with the proposed transaction, the VLS board unanimously approved the
transaction by written action effective as of July 1, 1999.
REASONS FOR MERGER
CARDIA'S REASONS FOR THE MERGER
A special committee of Cardia's board of directors has determined that
the merger is fair to and in the best interests of Cardia and its shareholders.
In reaching its determination, the special committee of the board of directors
considered a number of factors, including the following:
* the merger is an efficient way for Cardia to acquire cash necessary
for Cardia to pursue its business plans and strategies for growth;
* the merger will enable Cardia to obtain the services of Peter R.
Peterson as a member of its board of directors; and
* the merger will provide an efficient way for Cardia to expand the
ownership and interest in the company and its business.
VLS' REASONS FOR THE MERGER
VLS' board of directors has determined that the merger is fair to and
in the best interests of VLS and its shareholders. In reaching its
determination, the VLS board of directors considered a number of factors,
including the following:
* the merger will provide holders of VLS common stock with an
opportunity to obtain increased value through the potential growth
of an operating business, as compared to VLS which has not engaged
in any operational activity for approximately ten years;
* the merger will afford holders of VLS common stock with the
opportunity to own stock in an active business enterprise and
potentially participate in a market for their shares which is not
currently available to shareholders of VLS;
* the merger will offer holders of VLS common stock a greater
diversification of risk by an investment in Cardia instead of VLS.
In the course of its deliberations, the VLS board of directors reviewed
a number of additional factors relevant to the merger, including, among others:
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* the information concerning Cardia's business, prospects, financial
performance and condition, operations, technology, product lines,
management and competitive position;
* the potential market for the Cardia common stock;
* the consideration that VLS shareholders will receive in the merger;
* the greater potential liquidity of the Cardia common stock as
compared with VLS common stock;
* current industry and economic conditions;
* the alternatives available to VLS compared to the consideration
proposed to be paid to shareholders pursuant to the merger
agreement; and
* the determination that the terms of the merger agreement are
reasonable, including the provisions allowing VLS to respond to
certain unsolicited inquiries regarding an acquisition of VLS.
The VLS board of directors also considered a number of potentially
negative factors in its deliberations concerning the merger, including, but not
limited to:
* the loss of control over the future operations of VLS following the
merger;
* the other risks described above in "Risk Factors;" and
* the expected tax treatment of the merger.
The VLS board of directors believed that certain of these risks were
unlikely to occur or unlikely to have a material impact on the shareholders of
VLS or the combined company, while others could be avoided or mitigated by VLS
or Cardia, and that overall the risks associated with the merger were outweighed
by the potential benefits of the merger.
The foregoing discussion of information and factors considered by the
VLS board of directors is not intended to be all inclusive, but is believed to
include all material factors considered by the VLS board of directors. In view
of the wide variety of factors considered by the VLS board of directors, the VLS
board of directors did not find it practicable to quantify or otherwise assign
relative weight to the specific factors considered. However, after taking into
account all the factors set forth above, the VLS board of directors unanimously
agreed that the merger agreement and the consummation of the merger were fair
to, and in the best interests of VLS and its shareholders, and that VLS should
proceed with the merger.
A special committee of the Cardia board of directors also considered
certain potentially negative factors that may result from the merger, including:
* the potential dilutive effect on Cardia's common stock price if
revenue and earnings expectations of the combined company are not
achieved;
* the dilutive effect on Cardia's earnings per share in Cardia's
fiscal 1999; and
* the other risks and uncertainties discussed above under "Risk
Factors."
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In analyzing the proposed merger, the special committee of the Cardia
board of directors did not view any single factor as determinative and did not
quantify or assign weight to any of the factors. Rather, the special committee
of the Cardia board made its determination based upon the total mix of
information available to it.
RECOMMENDATION OF THE VLS BOARD
The VLS board of directors has unanimously adopted and approved the
merger agreement and approved the merger, and recommends a vote "For" the
adoption and approval of the merger agreement and approval of the merger by the
VLS shareholders.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of the VLS board of directors with
respect to the merger and the merger agreement, shareholders should be aware
that certain parties involved in, or associated with, the merger may have
interests that could adversely affect their judgment with respect to the merger.
As of June 30, 1999, the officers and directors of VLS beneficially
owned 224,875 shares (or approximately 21.1%) of VLS common stock. Pursuant to
the merger agreement, the board of directors of VLS has, subject to the
fiduciary duties of directors, agreed to use its best efforts to obtain the
requisite shareholder approval of the merger.
Peter R. Peterson, Chairman of the Board of Directors and Chief
Executive Officer of VLS, will become a director of Cardia. Each director of
Cardia who is not an employee may receive grants of options to purchase shares
of Cardia common stock at the fair market value of such shares on the date of
grant. Mr. Peterson owns 209,975 shares of VLS common stock, which represents
approximately 19.7% of the outstanding VLS common stock.
Joseph A. Marino, the Chief Executive Officer, President, Treasurer and
Chairman of the Board of Directors of Cardia, beneficially owns 75,000 shares of
common stock of VLS which represents approximately 7% of the issued and
outstanding shares of VLS. In addition, Patrick Delaney, a partner in the law
firm of Lindquist & Vennum P.L.L.P. which represents Cardia, beneficially owns
27,875 shares of common stock of VLS, which represents approximately 2.6% of the
issued and outstanding shares of the company. Mr. Delaney also serves as
Secretary of Cardia.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The following discussion summarizes some of the material federal income
tax considerations that will generally be applicable to the holders of VLS
common stock as a result of the merger. This discussion is not exhaustive of all
possible tax considerations and does not give a detailed description of any
state, local or foreign tax considerations. This discussion also does not
consider any aspect of federal income taxation that may be relevant to certain
types of VLS shareholders who may be subject to special treatment under federal
income tax laws.
EACH HOLDER OF VLS COMMON STOCK IS URGED AND EXPECTED TO CONSULT HIS OR
HER OWN TAX AND FINANCIAL ADVISORS AS TO THE EFFECT OF SUCH FEDERAL INCOME TAX
CONSEQUENCES ON HIS OR HER OWN PARTICULAR FACTS AND CIRCUMSTANCES AND ALSO AS TO
ANY STATE, LOCAL, FOREIGN OR OTHER FEDERAL TAX CONSEQUENCES ARISING OUT OF THE
MERGER.
This discussion is based on the current provisions of the Internal
Revenue Code of 1986, as amended, applicable Treasury Regulations now in effect
thereunder, judicial and administrative decisions, and Internal Revenue Service
rulings, all of which are subject to change, and certain factual assumptions
related to the ownership and operation of VLS and Cardia. There can be no
assurance that the legal authorities on which this discussion is
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based will not change, perhaps retroactively, that the factual assumptions
underlying this discussion will be accurate, or that there will not be a change
in the circumstances of VLS or Cardia that would affect this discussion. Neither
VLS nor Cardia plan to obtain any rulings from the IRS, or any opinions of tax
experts, concerning federal income tax issues with respect to the merger. Thus,
no assurance can be provided that the statements set forth in this discussion
will not be challenged by the Internal Revenue Service or will be sustained if
challenged.
The merger will be treated for federal income tax purposes as a taxable
sale of the shares of VLS common stock held by VLS shareholders. Accordingly,
the merger will result in a VLS shareholder recognizing gain or loss with
respect to each share of VLS common stock exchanged for Cardia common stock in
an amount equal to the difference between the shareholder's basis in the VLS
share and the fair market value, as of the effective time of the merger, of the
Cardia common stock and any cash in lieu of a fractional share received in
exchange for the VLS share. A shareholder's aggregate basis in the Cardia common
stock received would equal its fair market value on the date of the exchange,
and the shareholder's holding period for the Cardia common stock would begin the
day after the effective time of the merger.
Cardia's common stock does not currently trade on any exchange or other
market. Cardia has determined, however, that the fair market value of a share of
its common stock is $1.00. For purposes of that determination, Cardia has taken
into account the following facts:
* All issuances of Cardia common stock have been at $1.00 per share.
* Cardia sold 625,000 shares of its common stock during the first
quarter of 1999 at a price of $1.00 per share, with the most recent
sales occurring in March.
* Grants of options to purchase Cardia common stock have had an
exercise price of $1.00 per share.
* Cardia's net tangible book value (total assets less prepaid
expenses and intangible assets, minus total liabilities) was
approximately $1.00 per share as of June 30, 1999.
* A special committee of Cardia's board of directors has determined
that the reasonable value of the shares to be issued to VLS
shareholders in the merger is $1.00 per share.
Cardia's determination of the fair market value of its common stock is
subject to interpretation by the Internal Revenue Service. For federal income
tax purposes, the Internal Revenue Service defines fair market value as the
price that a willing buyer would pay a willing seller, both persons having
reasonable knowledge of all of the material facts and neither person being
under a compulsion to buy or sell. Further, the Internal Revenue Service has
stated that sales of similar property on or about the same date may be helpful
in determining the fair market value of the property. If the Internal Revenue
Service determines that the fair market value of the Cardia common stock issued
in the merger is different than $1.00 per share, the amount of gain or loss
recognized and reported by VLS shareholders will change.
The Taxpayer Relief Act of 1997 altered the taxation of capital gain
income. Under the Taxpayer Relief Act, individuals, trusts and estates that hold
certain investments for more than 18 months may be taxed at a maximum long-term
capital gain rate of 20% on the sale or exchange of those investments.
Individuals, trusts and estates that hold certain assets for more than one year
but not more than 18 months may be taxed at a maximum long-term capital gain
rate of 28% on the sale or exchange of those investments. The Taxpayer Relief
Act also provides a maximum rate of 25% for "unrecaptured Section 1250 gain" for
individuals, trusts and estates, special rules for "qualified 5-year gain" and
other changes to prior law. The IRS Restructuring Act of 1998, however, reduced
the holding period requirement established by the Taxpayer Relief Act for the
application of the 20% and 25% capital gain tax rates to 12 months from 18
months for sales of capital assets after December 31, 1997 and thus eliminated
the 28% rate. The Taxpayer Relief Act allows the Internal Revenue Service to
prescribe regulations on
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how the Taxpayer Relief Act's capital gain rates will apply to sales of capital
assets by "pass-through" entities. Again, VLS shareholders are urged and
expected to consult with their own tax advisors with respect to the rules
contained in the Taxpayer Relief Act and the IRS Restructuring Act and the
effect of these rules on their own particular tax situation.
VLS shareholders should attach to their federal income tax returns for
the year of the merger a statement of all facts pertinent to the recognition or
nonrecognition of gain or loss upon the exchange of VLS common stock for Cardia
common stock, including the shareholder's tax basis in the shareholder's VLS
common stock and a description of the Cardia common stock received.
ACCOUNTING TREATMENT OF THE MERGER
The acquisition of VLS by Cardia will be in the form of a merger of VLS
with and into Cardia. Accounting for the merger will result in an adjustment of
historical cost basis of the assets and liabilities of VLS. Because VLS has not
conducted an active trade on business, for accounting purposes the merger
transaction will be accounted for as a purchase of the net assets of VLS, which
consist principally of cash, cash equivalents and a note receivable.
EXPENSES
Cardia and VLS will pay their own expenses in connection with the
merger and the transactions contemplated thereby, including professional fees.
APPRAISAL RIGHTS
Although VLS' management believes that the following discussion of the
law pertaining to dissenter's rights under the Minnesota Business Corporation
Act (the "MBCA") provides an accurate description of the material provisions of
such law, such discussion does not purport to be complete and is qualified in
its entirety by reference to the full text of Sections 302A.471 and 302A.473 of
the MBCA attached to this document as a Appendix B. Any shareholder of VLS who
wishes to exercise such dissenters' rights or who wishes to preserve his or her
right to do so should review the following discussion and Appendix B carefully,
because failure to comply timely and properly with the procedures specified will
result in the loss of dissenters' rights in connection with the merger.
PROCEDURES TO PRESERVE DISSENTERS' RIGHTS
Under Minnesota law, any holder of VLS common stock who follows the
procedures set forth in Section 302A.473 of the MBCA will be entitled to receive
payment in cash of the "fair value" of such shareholder's shares. As used in
Section 302A.473, the "fair value of the shares" means the value of the shares
of VLS immediately before the effective date of the merger.
The merger agreement must be approved by the holders of a majority of
the outstanding shares of common stock of VLS.
Under Section 302A.473 of the MBCA, if a corporation calls a
shareholder meeting at which a plan of merger to which such corporation is a
party is to be voted upon, the notice of the meeting must inform each
shareholder of the right to dissent and must include a copy of Section 302A.471
and Section 302A.473 of the MBCA and a brief description of the procedure to be
followed under such sections. This document constitutes such notice to the
shareholders of VLS, and the applicable statutory provisions of the MBCA are
attached to this document as a Appendix B.
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A shareholder who wishes to exercise dissenters' rights must file with
VLS, before the vote on the merger agreement, a written notice of intent to
demand the fair value of the shares owned by such shareholder and must not vote
his or her shares in favor of the merger agreement. A vote against the merger
agreement will not in itself constitute such a written notice, and a failure to
vote will not affect the validity of a timely written notice. However, the
submission of a blank proxy will constitute a vote in favor of the merger
agreement and a waiver of statutory dissenters' rights.
The written notice should be executed by or on behalf of the holder of
record fully and correctly, as the holder's name appears on the holder's stock
certificates. If the shares of VLS common stock are owned of record in a
fiduciary capacity, such as by a trustee, guardian, or custodian, execution of
the written notice should be made in that capacity. If the shares of VLS common
stock are owned of record by a corporation or other organization, the written
notice must be executed by a duly authorized legal representative, such as an
officer. If the shares of VLS common stock are owned of record by more than one
person, as in a joint tenancy or tenancy in common, the notice should be
executed by or on behalf of all joint owners. An authorized agent, including one
or more joint owners, may execute a written notice on behalf of a holder of
record; however, the agent must identify the record owner or owners and, in
executing the written notice, must expressly disclose that the agent is agent
for such owner or owners.
All written notices should be sent or delivered to Paul R. Peterson,
Secretary, Video Learning Systems, Inc., 6111 Blue Circle Drive, Minnetonka,
Minnesota 55343-9108, so as to be received prior to the vote on the merger
agreement and the merger.
After the merger agreement has been approved by the shareholders of
VLS, VLS must send a written notice to all shareholders who have filed with VLS
before the vote on the merger agreement a written notice of intent to demand the
fair value of the shares owned by such shareholder and have not voted their
shares in favor of the merger agreement. The notice from VLS must contain:
1. the address to which a demand for payment and stock certificates
must be sent in order to obtain payment and the date by which they
must be received;
2. a form to be used to certify the date on which the shareholder, or
the beneficial owner on whose behalf the shareholder dissents,
acquired the shares or an interest in them and to demand payment;
and
3. a copy of Sections 302A.471 and 302A.473 of the MBCA and a brief
description of the procedures to be followed under such sections.
In order to receive the fair value of the shares, a dissenting
shareholder must demand payment and deposit his shares within 30 days after the
above-described written notice is given, but the dissenter retains all other
rights of a shareholder until the merger takes effect.
A shareholder may not assert dissenters' rights as to less than all of
the shares registered in the name of the shareholder. However, a record owner,
such as a broker who holds shares of VLS common stock as a nominee for several
beneficial owners, may exercise dissenters' rights with respect to all of the
shares of VLS common stock held for one or more beneficial owners while not
exercising such rights with respect to the shares of VLS common stock held for
other beneficial owners. In such case, the written notice of intent to demand
the fair value of the shares of VLS common stock must disclose the name and
address of each beneficial owner on whose behalf the shareholder dissents and
the number of shares of VLS common stock beneficially owned by each. In that
event, the rights of the dissenter will be determined as if the shares as to
which the shareholder has dissented and the other shares were registered in the
names of different shareholders. If no such information is provided, the written
notice will be presumed to cover all shares of VLS common stock held in the name
of the record owner.
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A person who is the beneficial owner of shares of VLS common stock held
in a brokerage account or other nominee form and who wishes to exercise
dissenters' rights must take all necessary steps in order that a written notice
is timely filed by the record holder of such shares. Alternatively, such
beneficial owner may assert dissenters' rights with respect to shares held on
his or her behalf and will be treated as a dissenting shareholder under the
terms of Sections 302A.471 and 302A.473, if the beneficial owner submits a
signed written consent of the record holder to VLS at the time of or before the
assertion of such rights. The written consent of the record holder will serve to
verify the beneficial owner's entitlement and allow the record holder to protect
any security interest in the shares.
Beneficial owners of VLS common stock are urged to consult with their
brokers to determine the appropriate procedures for asserting dissenters'
rights.
PROCEDURES FOLLOWING AN ASSERTION OF DISSENTERS' RIGHTS
After the effective date of the merger, or after VLS receives a valid
demand for payment, whichever is later, VLS must remit to each dissenting
shareholder who has not voted his or her shares in favor of the merger agreement
and has filed with VLS before the vote on the merger agreement a written notice
of intent to demand the fair value of the shares owned by such shareholder and
who has demanded payment and deposited his or her shares, the amount VLS
estimates to be the fair value of the shares, plus interest ("interest"
commences five days after the effective date of the merger up to and including
the date of payment, calculated at a rate provided under Minnesota law for
interest on verdicts and judgments), accompanied by:
1. VLS' closing balance sheet and statement of income for a fiscal
year ended not more than 16 months before the effective date of the
merger, together with the latest available interim financial
statements;
2. An estimate by VLS of the fair value of the shares and a brief
description of the method used to reach the estimate; and
3. A copy of Sections 302A.471 and 302A.473 of the MBCA, and a brief
description of the procedure to be followed in demanding
supplemental payment.
VLS may withhold the above-described remittance from a person who was
not a shareholder on the date the merger agreement was first announced to the
public or who is dissenting on behalf of a person who was not a beneficial owner
on that date. If the dissenter has not voted his or her shares in favor of the
merger agreement and has filed with VLS before the vote on the merger agreement
a written notice of intent to demand the fair value of the shares owned by such
shareholder, VLS must forward to such dissenter the materials described in the
preceding paragraph, a statement of the reason for withholding the remittance,
and an offer to pay to the dissenter the amount listed in the materials if the
dissenter agrees to accept that amount in full satisfaction. The dissenter may
decline the offer and demand payment of the dissenter's own estimate of the fair
market value of the shares, plus interest, by written notice to VLS. Failure to
do so entitles the dissenter only to the amount offered. If the dissenter makes
demand, the procedures, costs, fees and expenses described below for petitioning
the court shall apply.
If VLS fails to remit payment within 60 days of the deposit of
certificates, it must return all deposited certificates and cancel all transfer
restrictions. However, VLS may require a deposit or restrict transfer at a later
time and again give notice that contains:
1. The address to which a demand for payment and certificates of
certificated shares must be sent in order to obtain payment and the
date by which they must be received;
2. A form to be used to certify the date on which the shareholder, or
the beneficial owner on whose behalf the shareholder dissents,
acquired the shares or an interest in them and to demand payment;
and
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3. A copy of Sections 302A.471 and 302A.473 of the MBCA and a brief
description of the procedures to be followed under such sections.
If a dissenter believes that the amount remitted by VLS is less than
the fair value of the shares, plus interest, the dissenter may give written
notice to VLS of the dissenter's own estimate of the fair value of shares, plus
interest, within 30 days after VLS mails the remittance, and demand payment of
the difference. Otherwise, a dissenter is entitled only to the amount remitted
by VLS.
If VLS receives a demand, it must, within 60 days after receiving the
demand, either pay to the dissenter the amount demanded or agreed to by the
dissenter after discussion with VLS or file in the appropriate court a petition
requesting that the court determine the fair value of the shares, plus interest.
The petition must name as parties all dissenters who made a demand for payment
and who have not reached agreement with VLS. The jurisdiction of the court is
plenary and exclusive. The court may appoint appraisers, with powers and
authorities the court deems proper, to receive evidence on and recommend the
amount of the fair value of the shares. The court must determine whether the
shareholder or shareholders in question have fully complied with the
requirements of Section 302A.473 of the MBCA and must determine the fair value
of the shares, taking into account any and all factors the court finds relevant,
computed by any method or combination of methods that the court, in its
discretion, sees fit to use, whether or not used by VLS or by a dissenter. The
fair value of the shares as determined by the court is binding on all
shareholders, wherever located. A dissenter is entitled to judgment for the
amount by which the fair value of the shares as determined by the court, plus
interest, exceeds the amount, if any, remitted by VLS, but shall not be liable
to VLS for the amount, if any, by which the amount, if any, remitted to the
dissenter exceeds the fair value of the shares as determined by the court, plus
interest.
The court must determine the costs and expenses of any appraisers in a
proceeding under the preceding paragraph, including the reasonable expenses and
compensation of any appraisers appointed by the court, and must assess these
costs and expenses against VLS, except that the court may assess part or all of
those costs and expenses against a dissenter whose demand is found to be
arbitrary, vexatious, or not in good faith.
If the court finds that VLS has failed to comply substantially with
Section 302A.473 of the MBCA, the court may assess all fees and expenses of any
experts or attorneys as the court deems equitable. These fees and expenses may
also be assessed against a person who has acted arbitrarily, vexatiously, or not
in good faith in bringing the proceeding and may be awarded to a party injured
by those actions.
FAILURE TO FOLLOW THE STEPS REQUIRED BY SECTIONS 302A.471 AND 302A.473
OF THE MBCA FOR PERFECTING DISSENTERS' RIGHTS MAY RESULT IN THE LOSS OF THOSE
RIGHTS.
RESALE OF CARDIA COMMON STOCK
The Cardia common stock issued in connection with the merger will be
freely transferable, except that shares issued to any VLS shareholder who is an
affiliate of VLS or who becomes an affiliate of Cardia are subject to certain
restrictions on resale, transfer or other disposition. An affiliate is defined
generally as persons who control, are controlled by or are under common control
with a company at the time of determination. Affiliates generally include
directors and executive officers of VLS. Cardia common stock received by those
shareholders who are deemed to be affiliates of VLS may be resold without
registrations as provided by Rules 144 and 145, or as otherwise permitted under
the Securities Act of 1933. Assuming Cardia continues to be subject to, and
complies with, the reporting requirements of the Securities Exchange Act of
1934, Rule 145(d) allows limited resales by such affiliates without registration
if the holder: (i) has held the shares of Cardia common stock for one year and
is not an affiliate of Cardia at the time of sale; or (ii) has held the shares
of Cardia common stock for two years and has not been an affiliate of Cardia for
at least three months; or (iii) sells the shares in a Rule 144 brokers'
transaction in a manner and subject to the quantity limitations of such rule.
This document does not cover any resales of Cardia common stock received by
affiliates of VLS, their family members or related interests.
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EACH SHAREHOLDER WHO MAY BE DEEMED TO BE AN AFFILIATE IS URGED TO
CONSULT INDEPENDENT COUNSEL CONCERNING APPLICABLE RESTRICTIONS ON RESALE.
MATERIAL TERMS OF THE MERGER AGREEMENT
The following description of the merger agreement describes the
material terms of the merger agreement. The full text of the merger agreement is
attached as Appendix A to this document and is incorporated by reference.
We encourage you to read the entire merger agreement.
STRUCTURE OF THE MERGER
Under the merger agreement, VLS will merge with and into Cardia such
that the separate legal existence of VLS will cease. All property, rights,
privileges, powers and franchises of VLS will vest in Cardia.
EFFECTIVE TIME OF THE MERGER
The merger will become effective when the articles of merger are filed
with the Secretary of State of the State of Minnesota. If all the conditions to
the merger contained in the merger agreement are satisfied or waived, we
anticipate the effective time will occur on the date of the special meeting or
as soon as practicable following the special meeting.
MERGER CONSIDERATION
At the effective time, each share of VLS common stock will
automatically be converted into a fraction of a share of Cardia common stock
equal to 200,000 shares of Cardia common stock divided by the sum of the total
number of shares of VLS common stock outstanding immediately prior to the
effective time of the merger such that each holder of VLS a common stock will
have a right to receive .188 of a share of Cardia common stock. Based upon the
merger consideration, holders of VLS common stock will own approximately 16.7%
of the outstanding common stock of Cardia.
Cardia will not issue any fractional shares in the merger. Holders of
VLS common stock will receive a cash payment in the amount determined by
multiplying $1.00 by the fractional share of Cardia common stock to which such
shareholder would otherwise be entitled. Cardia will make available to the
exchange agent any cash necessary for this purpose.
EXCHANGE OF SHARES
We will appoint an exchange agent to handle the exchange of VLS stock
certificates in the merger for Cardia common stock and the payment of cash for
fractional shares. Soon after the closing, the exchange agent will send to each
holder of VLS common stock a letter of transmittal for use in the exchange and
instructions explaining how to surrender VLS stock certificates to the exchange
agent. Holders of VLS common stock that surrender their certificates to the
exchange agent, together with a properly completed letter of transmittal, will
receive the appropriate merger consideration. Holders of unexchanged shares of
VLS will not be entitled to receive any dividends of other distributions which
may be payable by Cardia after the closing until their certificates are
surrendered.
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CONDITIONS TO THE MERGER
CONDITIONS TO THE OBLIGATIONS OF EACH PARTY
The obligations of Cardia and VLS to complete the merger are subject to
the following conditions:
* adoption of the merger agreement and approval of the merger by the
VLS shareholders;
* absence of any final order, decree or legal action making the
merger illegal or prohibiting the merger;
* receipt of all material approvals and consents of third parties
necessary to consummate the merger;
* receipt of all permits or other authorizations required by
applicable state securities laws for the Cardia common stock to be
issued in connection with the merger; and
* the Registration Statement of which this document is a part being
declared effective under the Securities Act of 1993.
CONDITIONS TO THE OBLIGATION OF VLS
The obligation of VLS to complete the merger is subject to the
following additional conditions:
* compliance by Cardia with its obligations under the merger
agreement and the representations and warranties made by Cardia in
the merger agreement being true as of the effective time of the
merger as if made at that time. Any inaccuracies in the
representations and warranties will be disregarded if the
circumstances giving rise to all inaccuracies considered
collectively do not constitute a material adverse effect on Cardia;
and
* Lindquist & Vennum P.L.L.P. delivering to VLS its legal opinion.
CONDITIONS TO THE OBLIGATION OF CARDIA
The obligation of Cardia to complete the merger is subject to the
following additional conditions:
* compliance by VLS with its obligations under the merger agreement
and the representations and warranties made by VLS in the merger
agreement being true as of the effective time of the merger as if
made at that time. Any inaccuracies in representations and
warranties will be disregarded if the circumstances giving rise to
all inaccuracies considered collectively do not constitute a
material adverse effect on VLS; and
* Duckson & Carlson, LLC delivering to Cardia its legal opinion.
For purposes of the merger agreement, the term "Material Adverse
Effect" means an effect that is, or at the time of the effect it is probable
that the effect will be, materially adverse (1) to the company's business,
results of operation or financial condition, (2) to the ability of the company
to conduct its business, as presently conducted, following the effective time,
or the ability of Cardia to derive the benefits of owning all of the stock of
the surviving corporation, or (3) to the company's ability to perform any of its
material obligations under the merger agreement or to consummate the merger.
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REPRESENTATIONS AND WARRANTIES
The merger agreement contains customary representations and warranties
of VLS and Cardia relating to, among other things, aspects of the respective
businesses of the companies and other matters. The representations and
warranties expire at the effective time of the merger.
COVENANTS; CONDUCT OF BUSINESS PRIOR TO THE MERGER
AFFIRMATIVE COVENANTS OF VLS
VLS has agreed that, prior to the effective time, except to the extent
Cardia shall consent in writing, VLS will:
* conduct its operations, to the extent commercially reasonable,
according to its ordinary and usual course of business and
consistent with past practice;
* use commercially reasonable efforts to obtain all material
approvals and consents of third parties necessary to consummate the
transactions contemplated by the merger agreement;
* notify Cardia of the occurrence of any event that will or could
reasonably be expected to cause VLS to fail any of the conditions
to the obligations of each party or of Cardia as set forth above;
and
* call and hold a meeting of its shareholders for the purpose of
considering and acting upon a proposal to consummate the
transactions contemplated by the merger agreement.
AFFIRMATIVE COVENANTS OF CARDIA
Cardia has agreed that, prior to the effective time, it will, except to
the extent that VLS shall consent in writing, Cardia will:
* conduct its operations, to the extent commercially reasonable,
according to its ordinary and usual course of business and
consistent with past practice;
* use commercially reasonable efforts to obtain all material
approvals and consents of third parties necessary to consummate the
transactions contemplated by the merger agreement;
* notify VLS of the occurrence of any event that will or could
reasonably be expected to cause Cardia to fail any of the
conditions to the obligations of each party or of VLS as set forth
above; and
* use commercially reasonable efforts following the merger to cause
the Cardia common stock to be quoted in the "pink sheets" and
approved for trading on the local over-the-counter market.
MUTUAL COVENANTS OF BOTH CARDIA AND VLS
Cardia and VLS have each agreed that, prior to the effective time, they
will:
* permit the other company to inspect its records and to consult with
its officers, employees, consultants, advisors, distributors,
customers, suppliers and other companies having business with VLS
during normal business hours;
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* notify the other company of the occurrence of any event that will
or could reasonably be expected to result in a failure to satisfy
certain conditions of the merger;
* use commercially reasonable efforts to have declared effective or
approved all documents and notifications with any governmental or
regulatory bodies; and
* use commercially reasonable efforts to take all action necessary to
consummate the transactions in the merger agreement.
LIMITATION ON DISCUSSING OR NEGOTIATING OTHER TRANSACTION PROPOSALS
VLS has agreed not to, directly or indirectly:
* solicit, knowingly encourage, initiate, or participate in any way
in discussions or negotiations with, or knowingly provide any
nonpublic information to, a third party concerning an alternative
transaction. An alternative transaction includes any tender offer,
exchange offer, merger, consolidation, share exchange, business
combination or similar transaction, an acquisition of more than 50%
of the VLS common stock or a sale, lease, exchange, license,
transfer or other disposition of more than 50% of VLS' assets in a
single or series of related transactions; or
* otherwise knowingly facilitate any effort or attempt to propose,
make or implement an alternative transaction.
These clauses and the other provisions of the merger agreement,
however, will not prohibit VLS from, prior to the vote of the VLS shareholders
in the merger, furnishing nonpublic information to or entering into discussions
or negotiations with any third party that makes an unsolicited superior
proposal, defined below, if, and only to the extent that
* VLS' board of directors reasonably and in good faith determines
that failure to take that action would be inconsistent with its
fiduciary duties to VLS' shareholders;
* prior to furnishing nonpublic information to or entering into
discussions or negotiations with the third party, VLS (1) provides
written notice to Cardia that it intends to furnish information to
or enter into discussions or negotiations with a third party making
a superior proposal, naming the person or entity making the
superior proposal and (2) receives from such third party an
executed confidentiality agreement with terms no less favorable to
VLS than the confidentiality agreement with Cardia; and
* VLS provides Cardia with all nonpublic information to be provided
to the third party and keeps Cardia informed, on a daily or more
regular basis of the status, terms and conditions and all other
material information with respect to any discussions or
negotiations.
For purposes of the merger agreement, the term "Superior Proposal"
means a proposal for an alternative transaction that the VLS board of directors
determines, reasonably and in good faith to be more favorable to VLS'
shareholders than the merger. This determination must be made after consultation
with VLS' financial advisors, taking into account the likelihood of consummation
of the alternative transaction, including, but not limited to, the conditions to
consummation and the consequences under the alternative transaction of any
material adverse effects or changes in VLS.
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TERMINATION OF THE AGREEMENT
The merger agreement may be terminated at any time prior to the
effective time as follows:
* by mutual written consent of Cardia and VLS duly authorized by
the board of directors of each Cardia and VLS;
* by Cardia or VLS if a court or an administrative, governmental
or regulatory authority has issued a final nonappealable
order, decree or ruling, or taken any other action, having the
effect of permanently restraining, enjoining or prohibiting
the merger;
* by Cardia or VLS if VLS' shareholders do not approve and adopt
the merger agreement and the merger (however, such right to
terminate will not be available to any company that breached
in any material respect its obligations under the merger
agreement in a manner that proximately contributed to the
failure to obtain that shareholder approval);
* by Cardia if
- VLS has breached its obligations with respect to
alternative transactions as discussed above;
- VLS' board of directors recommends, approves or
authorizes VLS' acceptance or execution of a letter
of intent or definitive agreement providing for an
alternative transaction;
- VLS' board of directors has modified in a manner
materially adverse to Cardia, or withdrawn, its
recommendation of the merger agreement; or
- a tender offer or exchange offer for any outstanding
shares of VLS common stock is commenced and the VLS
board of directors, within 10 days of such tender
offer or exchange offer is commenced, fails to
recommend against acceptance or the tender offer by
its shareholders or exchange offer or takes no
position with respect to the acceptance of the tender
or exchange offer by VLS' shareholders.
* by Cardia or VLS prior to the approval by the shareholders of
VLS if
- VLS' board of directors has authorized VLS to enter
into a letter of intent or binding written agreement
concerning a superior proposal and has provided
written notice to Cardia of the proposal;
- Cardia does not make, within 10 business days after
receipt of VLS' written notice of its intention to
enter into the letter of intent or binding agreement,
an offer that the VLS board determines is at least as
favorable to VLS' shareholders as the superior
proposal; and
- upon a termination under these circumstances, VLS
agrees not to enter into such a letter of intent
until at least the eleventh business day after Cardia
has received written notice from VLS and to notify
Cardia of its intention to enter into such a letter
of intent or binding agreement changes.
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* by Cardia if VLS is not in material breach of its obligations
under the merger agreement and there has been a material
breach by VLS of any of VLS' representations, warranties or
obligations under the merger agreement so that the conditions
of the obligations of Cardia to close the merger cannot be
satisfied and the breach cannot be cured by VLS through the
exercise of reasonable efforts; or
* by VLS if Cardia is not in material breach of its obligations
under the agreement and there has been a material breach by
Cardia of any of Cardia's representations, warranties or
obligations under the merger agreement so that the conditions
to the obligations of VLS to close the merger cannot be
satisfied and the breach cannot be cured by Cardia through the
exercise of reasonable efforts.
INFORMATION WITH RESPECT TO CARDIA
BUSINESS OF CARDIA
INTRODUCTION
Cardia, Inc., a Minnesota corporation, was formed in October of 1998 as
a subsidiary of Applied Biometrics, Inc. to develop, manufacture and market
transcatheter closure device products for the repair of certain cardiac defects.
These products are based, in part, on certain intellectual property rights
Applied Biometrics acquired in November of 1997 from Bernhard Schneidt and Dr.
Rainer Schrader. Prior to October of 1998, a division of Applied Biometrics
engaged in the development of transcatheter closure devices. As of October of
1998, Cardia assumed all activity relating to the development and marketing of
these products.
On February 11, 1999, Applied Biometrics distributed 375,000 shares of
the Company's common stock to Applied Biometrics shareholders. Concurrent with
the distribution, Cardia sold 125,000 shares of Cardia common stock at a price
of $1.00 per share to an officer of the company.
Subsequent to the distribution, Cardia completed a rights offering of
its common stock to sell an aggregate of 500,000 shares of common stock at a
subscription price of $1.00 per share, on the basis of one right for each share
of Cardia stock held by a shareholder immediately after the distribution.
PRODUCTS
Transcatheter closure devices are an entirely new family of small,
implantable devices which are delivered through a catheter inserted into a major
blood vessel to permanently repair certain cardiac defects in children and
adults. The procedure is performed in a cardiac catheterization lab and is
intended to reduce the need for open heart surgery, which is currently the
accepted method of repairing these defects. Cardia is currently developing these
closure devices and selling them on an experimental basis in Europe. Cardia
hopes to develop a product family that will be capable of providing an
effective, nonsurgical method of correcting a variety of cardiac defects. Cardia
believes its closure devices offer certain advantages over transcatheter closure
devices offered by its competitors.
Cardia is currently marketing and selling a device for the closure of a
cardiac defect known as patent ductus arteriosus. This defect is an abnormal
passage between two major vessels of the heart and is generally corrected in
children. Cardia is marketing and selling this device on an experimental basis
in Europe only. That product has been implanted successfully in over 150 human
cases.
Cardia is also currently focusing significant development and
regulatory approval efforts on a closure device for the correction of another
cardiac defect known as patent foramen ovale. The foramen ovale defect is an
abnormal passage between the right and left chambers of the heart and is
generally corrected in adults. Cardia expects to
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complete enhancements to its adult device in the near future and intends to
begin marketing and distributing the product in Europe after certain regulatory
requirements have been met.
Since the purchase of its closure device technology, Cardia has
effected minimal sales of its pediatric device, and Cardia has turned its focus
to the adult device. During 1998, that product was implanted successfully in
over 30 human cases on an experimental basis. Cardia is currently collecting
data from follow-up examinations of patients who have received Cardia's closure
devices. Follow-up data is extremely limited to date. Cardia is aware of
fractures or bends that have occurred in certain metal components of its own and
closure device products of other manufacturers. Such fractures and bends,
however, are not generally regarded as having significant potential for clinical
risks. Cardia intends to develop its products in a manner designed to avoid such
problems in the future.
STRATEGY
Cardia is currently developing two transcatheter closure device
products, one for the pediatric defect market and one for the adult defect
market. Cardia's pediatric closure device is currently being marketed on an
experimental basis in Germany and Switzerland. Cardia is currently seeking the
necessary regulatory approval to market this device on a broader basis in
additional European Union countries. Cardia intends to commence the process for
pursuing FDA approval in the United States following regulatory approval in
Europe, if obtained.
Cardia estimates that the market for adult closure devices is
significantly larger than the market for pediatric closure devices. Cardia,
therefore, intends to focus most of its resources during the next twelve months
on continuing to develop, test and pursue regulatory approval to market and sell
its adult line of closure devices in Europe and the United States.
Initial development and testing efforts are focused on the European
market, where Cardia has received certain certifications and has commenced the
process for obtaining additional required certifications for its pediatric and
adult products. These certifications are required for the general sale of
medical devices in Europe. Cardia anticipates receiving the necessary
certifications during the second half of 1999. Cardia is currently selling its
pediatric and adult devices on a very limited basis in Germany and Switzerland
in reliance on an experimental device process that is restrictive, costly and
time consuming. If it obtains the additional required certifications, Cardia
expects to expand its marketing and sales endeavors for its closure devices to
other European countries. These certifications would allow Cardia to expand its
marketing efforts in Europe and would reduce the cost and complexity of the
marketing and sales process. There can be no assurance that Cardia will be able
to obtain the additional required certifications.
Cardia has not determined when it will commence the process to pursue
FDA approval for its products under development. It does not currently intend,
however, to pursue FDA approval until it has completed its clinical testing and
certification processes in Europe. There can be no assurance that Cardia will be
able to obtain FDA approval for any of its products under development.
MARKETING, SALES AND DISTRIBUTION
Cardia believes its closure devices under development will have a broad
range of applications for the closure of congenital and acquired cardiac
defects. Cardia's pediatric closure device has the potential to reduce the need
for open heart surgery as the method of closure in many of the nearly 14,000
cases annually in the United States and Europe. Cardia also believes that the
adult cardiac defect, which may be a cause of paradoxical or otherwise
inexplicable strokes, represents an even larger market for the prevention of
recurring embolic events. Cardia estimates that, as a result of the recent
development of an accurate test for detecting adult cardiac defects in victims
of paradoxical strokes, there may be more than 250,000 adult closure cases
annually in the United States and Europe. There is, however, no current
consensus on the size of the adult closure market.
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Cardia's initial full-scale marketing and sales efforts will commence
in Europe immediately following Cardia's receipt of all necessary
certifications. Sales and distribution efforts in European countries will be
conducted through either a direct sales force or specialized distributors,
depending on the country. Cardia expects to use a direct sales force in the
United States when sales are permitted.
Cardia intends to create a market for its adult closure device by
focusing on neurologists and cardiologists. Neurologists are important to the
process because they are often the medical professionals who first see victims
of paradoxical strokes. If a neurologist determines, via testing, that a cardiac
defect is the cause of a paradoxical stroke and should be closed, the patient is
referred to a cardiologist. Cardia's adult closure device is implanted by a
cardiologist in a cathlab, using standard catheterization procedures. The
implantation procedure is minimally invasive, and the patient can usually be
sent home within twenty-four hours. Cardia's goal is to demonstrate to
neurologists and cardiologists that its closure device products under
development are a safe, effective, minimally invasive alternative to open heart
surgery.
RESEARCH AND DEVELOPMENT
Cardia's ongoing plans for research and development for its pediatric
and adult closure devices include further improvements of the acquired
technology and investigation into modified devices for new applications. Cardia
will perform animal pilot trials on those devices which appear to be the most
promising. Cardia expects to spend approximately $100,000 to $200,000 to
complete development of its existing closing device devices during 1999.
COMPETITION
Cardia's competitors in the cardiac defect closure field are believed
to be small to medium sized companies, the most prominent of which are Nitinol
Medical Technologies, Inc. located in Boston, Massachusetts, and AGA Medical
Corporation and Microvena, Corp., both located in Minneapolis, Minnesota. Cardia
believes that one or more of these companies is in clinical trials with closure
devices that would compete with Cardia's closure devices. Cardia's competitors
may have greater resources and be able to penetrate the transcatheter closure
device market in Europe and the United States sooner than Cardia. Although
Cardia believes its closure devices are based on sound and competitive
technology, there can be no assurance that Cardia's present products will be
able to compete successfully with existing or future competitive products or
that Cardia will be able to develop or acquire additional products or otherwise
effectively respond to new products or technological advances developed by
competitors. If Cardia fails to effectively penetrate markets sooner than its
competitors or to successfully compete with existing or future products or
technologies Cardia's anticipated revenues and earnings could be significantly
reduced or eliminated.
GOVERNMENT REGULATION
Government regulation in the United States and other countries is a
significant factor in the development and marketing of Cardia's products and in
Cardia's ongoing manufacturing and research and development activities. Cardia
and its products are regulated by the FDA under a number of statutes, including
the Federal Food, Drug and Cosmetic Act.
Under the Federal Food, Drug and Cosmetic Act, medical devices are
categorized into one of three classes, Class I, II or III, on the basis of the
controls deemed necessary to reasonably ensure their safety and effectiveness.
Class I devices are subject to the least extensive controls, as the safety and
effectiveness reasonably can be assured through general controls such as
labeling, premarket notification and adherence to the FDA's good manufacturing
practices. For Class II devices, safety and effectiveness can be assured through
the use of special controls, such as performance standards, post-market
surveillance, patient registries and FDA guidelines. Class III devices, which
are life-sustaining or life-supporting implantable devices, or new devices which
have been found not to be substantially
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equivalent to legally marketed devices, require the highest level of control,
generally requiring premarket approval by the FDA to ensure their safety and
effectiveness. All companies subject to FDA regulation must comply with a
variety of rules, including the FDA's good manufacturing practices regulations,
and are subject to periodic inspections by the FDA and other applicable
agencies. If the FDA believes that its regulations have not been fulfilled, it
may implement extensive enforcement powers which were strengthened by the
enactment of the Safe Medical Devices Act of 1990. The FDA's powers include, but
are not limited to, the ability to ban products from the market, prohibit the
operation of manufacturing facilities and effect recalls of products from
customer locations.
If a manufacturer or distributor of medical devices can establish that
a proposed device is "substantially equivalent" to a legally marketed Class I or
Class II medical device or to a Class III medical device for which the FDA has
not required a premarket approval application, the manufacturer or distributor
may seek FDA marketing clearance for the device by filing a 510(k) notification.
Following submission of the 510(k) notification, the manufacturer or distributor
may not place the device into commercial distribution in the United States until
an order has been issued by the FDA. The FDA's target for issuing such orders is
within 90 days of submission, but the process can take significantly longer. The
order may declare the FDA's determination that the device is "substantially
equivalent" to another legally marketed device and allow the proposed device to
be marketed in the United States. The FDA may, however, determine that the
proposed device is not substantially equivalent or may require further
information, such as additional test data, before making a determination
regarding substantial equivalence. Cardia, however, does not believe that its
closure device products under development are substantially equivalent to
another legally marketed device.
If a manufacturer or distributor of medical devices cannot establish
that a proposed device is substantially equivalent to another device via the
510(k) process, the manufacturer or distributor must seek premarket approval of
the proposed device. A premarket approval application must be submitted,
supported by extensive data, including preclinical and clinical trial and
follow-up data, to prove the safety and efficacy of the device. Generally, a
company is required to obtain an investigative device exemption before it
commences clinical testing in the United States in support of a pre-market
approval application. The FDA monitors and oversees the use and distribution of
such "research use only" and "investigational use only" products. Although by
statute, the FDA has 180 days to review a premarket approval application once it
has been accepted for filing, during which time an advisory committee may also
evaluate the application and provide recommendations to the FDA, premarket
approval application reviews often extend over a significantly protracted time
period, usually 12 to 24 months or longer from filing. Accordingly, there can be
no assurance the FDA review of any premarket approval application submitted by
Cardia will not encounter prolonged delays or that the data collected and
submitted by Cardia in its premarket approval application will support approval.
Cardia intends to obtain Class III market clearance for its closure
devices through the FDA's investigative device exemption/premarket approval
application process. It has not yet determined, however, when it intends to file
the first investigative device exemption application for U.S. clinical trials.
The FDA and the Federal Trade Commission have the power to scrutinize
labeling and promotional activities. The FDA also imposes post-marketing
controls on Cardia and its products, and registration, listing, medical device
reporting, post-market surveillance, device tracking and other requirements on
medical devices. If Cardia fails to meet these pervasive FDA requirements, or
receives adverse FDA determinations regarding Cardia's clinical and preclinical
trials, Cardia and its employees could be subject to injunction, prosecution,
civil fines, seizure or recall of products, prohibition of sales, or suspension
or withdrawal of any previously granted approvals.
The Federal Food, Drug and Cosmetic Act regulates Cardia's quality
control and manufacturing procedures by requiring Cardia and its contract
manufacturers to demonstrate compliance with current good manufacturing
practices as specified in published FDA regulations. The FDA monitors compliance
with good manufacturing practices by requiring manufacturers to register with
the FDA, which subjects them to periodic unannounced FDA inspections of
manufacturing facilities. The continued marketing of Cardia's products may be
adversely affected if violations of applicable regulations are noted during FDA
inspections of Cardia's
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manufacturing facilities or the facilities of its contract manufacturers. Such
regulations are subject to change and depend heavily on administrative
interpretations. There can be no assurance that future changes in regulations or
interpretations made by the FDA or other regulatory bodies, with possible
retroactive effect, will not adversely affect Cardia.
Sales of medical devices outside of the United States are subject to
United States export requirements and foreign regulatory requirements. Legal
restrictions on the sale of imported medical devices vary from country to
country. The time required to obtain approval by a foreign country may be longer
or shorter than that required for FDA approval, and the requirements may differ.
For countries in the European Union, certification procedures are available for
medical devices, the successful completion of which allows the certified devices
both to be shipped from the United States and to be placed on the market in all
European countries. Medical devices may not be sold in a general manner in
Europe unless they display a mark indicating compliance with these procedures.
There can be no assurance that Cardia will be able to obtain regulatory
approvals or clearances for its products in foreign countries.
No assurance can be given that the FDA or other regulatory authorities
will give, on a timely basis, if at all, the requisite approvals for medical
products currently under development by Cardia or that may be developed by
Cardia in the future. Even if approvals are received, the process of obtaining
clearance to market medical products is costly and time consuming and can delay
the marketing and sale of Cardia's products. Further, federal, state, foreign
and other regulations regarding the manufacture and sale of medical devices are
subject to change. Cardia cannot predict what impact such changes, if any, might
have on its business, financial condition or results of operations.
MANUFACTURING AND OPERATIONS
Cardia manufactures and assembles its closure devices at its facilities
in Burnsville, Minnesota. Certain of the components of Cardia's products are
manufactured by third-party vendors. Cardia has received certification that its
manufacturing facilities comply with European standards for quality assurance
and manufacturing process control.
Because Cardia is in an early stage of development, its business is not
currently dependent on one or a few major customers. It is also not currently
dependent on a limited number of sources or availability of raw materials to
manufacture its products under development.
PATENTS, TRADEMARKS AND PROPRIETARY RIGHTS
There are several patents relating to Cardia's closure devices. A U.S.
patent, two German utility model registrations and a pending European patent
application exist for its pediatric closure device. A German utility model
application, three U.S. patent applications and a Patent Cooperation Treaty
patent application have been filed for Cardia's adult closure device. It is the
intention of Cardia to file for a European and U.S. patent, based upon the
Patent Cooperation Treaty patent application, for its adult closure device as
well as its other closure devices.
There can be no assurance that patents will issue on products under
development by Cardia or to be developed by Cardia in the future, that the
patents issued to Cardia in the past or in the future will be of material
benefit, or that Cardia will have sufficient resources to enforce its patent
rights. Nor can there be any assurance that Cardia's products do not infringe on
patents, copyrights or other proprietary information known or claimed by others,
or that others will not successfully utilize part of or all of Cardia's
technologies without compensation to Cardia. If Cardia is found to have
infringed on the rights of a third party, Cardia may be unable to market its
products without a license from such third party. There can be no assurance that
Cardia would be able to obtain such a license on satisfactory terms, or at all.
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Cardia also relies for protection of trade secrets and proprietary
know-how on its internal security and secrecy measures and on employment and
consulting agreements requiring employees and consultants of Cardia to observe
the confidentiality of company information and to assign to Cardia inventions
developed in the course of work performed for Cardia.
EMPLOYEES
Cardia currently employs 6 full-time employees and 2 part-time
employees. The full-time employees are engaged in sales and marketing
activities. The part-time employees are engaged in various activities including
research and development, manufacturing and general administration. Cardia
believes that its relations with its employees are good. None of Cardia's
employees is covered by a collective bargaining agreement.
PROPERTIES
Cardia leases approximately 1,000 square feet of space in Burnsville,
Minnesota, a suburb of Minneapolis. The lease provides for monthly rental
payments of $1,250 through the expiration of the lease in September of 1999.
Cardia is also obligated to pay real estate taxes, insurance and maintenance
expenses associated with the leased facilities. Cardia believes that its present
facilities are in good condition and adequate for its current operations.
LEGAL PROCEEDINGS
Cardia is not a party to any litigation and is not aware of any
threatened litigation that would have a material adverse effect on its financial
condition or results of operations.
MARKET FOR CARDIA'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
MARKET INFORMATION
As of the date of this prospectus/proxy statement, there is no public
trading market in the United States or elsewhere for the Cardia common stock.
Upon the consummation of the merger, the Cardia common stock is expected to be
eligible for quotation in the "pink sheets" and approved for trading on the
local over-the-counter market under the symbol "CRDI." There can be, and is, no
assurance that market makers will make or maintain a market in the Cardia common
stock or that, even if a market is made and maintained in the stock or that the
Cardia common stock will trade at prices deemed attractive or reasonable to the
current shareholders of Cardia or shareholders of VLS that will received shares
of Cardia common stock in connection with the merger.
HOLDERS
The approximate number of holders of record of Cardia common stock at
June 30, 1999 was 79. Cardia believes that these record holders represent
approximately 1,200 beneficial owners.
DIVIDEND POLICY
Cardia has never declared or paid dividends on its common stock and has
no plans to pay dividends in the foreseeable future. Cardia currently intends to
retain any earnings for use in the operation and expansion of its business.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussions should be read in conjunction with Cardia's
financial statements and the notes appearing elsewhere in this document.
MANAGEMENT'S PLAN OF OPERATION
Cardia, Inc. was formed in October of 1998 as a subsidiary of Applied
Biometrics, Inc. to take over the development of certain in-process technology
relating to transcatheter closure devices for cardiac defects that Applied
Biometrics acquired in November of 1997. Cardia assumed all activity relating to
the development and marketing of the closure devices based on the in-process
technology in October of 1998. Cardia plans to continue research and
development, as well as conduct clinical trials for its closure devices. These
research and development activities will include further improvements of the
acquired technology, continued testing and improvement of the closure device
technology Cardia has developed, and investigation of modified devices for new
applications. Cardia will perform animal pilot trials on those devices which
appear to be the most promising. Cardia expects to spend approximately $100,000
to $200,000 to complete development of its existing closure devices during 1999.
Cardia currently expects that it will be in a position to commence commercial
sales of its closure devices in Europe following receipt of certain regulatory
certifications, which is anticipated to be received during the second half of
1999. Although Cardia believes its in-process technology has substantial
advantages over the technology used in competitive closure devices, there can be
no assurance that Cardia will successfully complete development of its
technology.
Cardia does not expect to make material capital investments in plant or
equipment during 1999. Cardia expects to spend between $600,000 and $700,000 on
selling, marketing and general administrative salaries and overhead during 1999.
The majority of these expenditures will relate to Cardia's sales and marketing
activities. These expenditures are not currently fixed costs and the amount
spent during 1999 will depend largely on the performance and growth of Cardia's
business during the next twelve months. Accordingly, Cardia will be able to
adjust these expenses based on revenues and cash flows.
RESULTS OF OPERATIONS
REVENUES. Revenues for the six months ended June 30, 1999 were $444,003
as compared to revenues of $37,440 in the first six months of 1998. To date,
Cardia's modest revenues have been generated by marketing its pediatric and
adult closure devices on an experimental basis in Germany and Switzerland.
Cardia is currently seeking the necessary regulatory approvals to market these
devices on a broader basis in additional European Union countries. However,
Cardia has turned its primary focus toward the development of its adult device
and expects the majority of future revenue to be generated from the sale of this
product. Cardia does not expect to realize significant revenues until product
development is complete and Cardia has obtained necessary regulatory approvals
to market its products in Europe and the United States.
GROSS PROFIT. Gross profit for the six months ended June 30, 1999 was
$315,992, up from $29,956 in the first six months of 1998. The increase in gross
profit in 1999 from the same period in the previous the year can be attributed
in part to the lower costs associated with operating the business Cardia
acquired in connection with the spin-off from Applied Biometrics, Inc. during
the first quarter of 1999 and the revenues generated by Cardia in connection
with sales of its transcatheter closure devices which were limited during the
first six months of 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Cardia expended $524,683
in the first six months of 1999 on selling, general and administrative expenses,
up from $241,783 in the first six months of 1998. The majority of these expenses
are attributable to Cardia's sales and marketing activities. These expenditures
are not currently fixed
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costs and the amount spent during the remainder of 1999 will depend largely on
the performance and growth of Cardia's business. Accordingly, Cardia will adjust
these expenses based on revenues and cash flows. Cardia does not expect to make
material capital investments in plant or equipment during 1999. However, Cardia
expects to add between four and six full-time employees during 1999. Those
additional personnel will not be added, however, unless business growth
justifies additional employees.
RESEARCH AND DEVELOPMENT. Research and development costs accounted for
$18,062, or approximately 3.3% of total operating expenses, down from $207,427
expended in the first six months of 1998. Cardia's on-going plans for research
and development for its pediatric and adult closure devices include further
improvements of the acquired technology and investigation into modified devices
for new applications. Cardia expects to spend approximately $100,000 to $200,000
to complete development of its existing closure devices during 1999.
NET LOSS. Cardia recognized a loss of $226,753 in the first six months
of 1999, as compared to a loss of $419,254 recognized in the first six months of
1998.
LIQUIDITY AND CAPITAL RESOURCES
Cardia's liquidity as of June 30, 1999 consisted of approximately
$484,285 in cash, including the proceeds of the Company's rights offering which
are reflected on the Company's financial statements for the period reported on
herein, and $143,031 in accounts receivable. Assuming Cardia does not receive
revenue from the sale of its closure devices, Cardia believes that this
liquidity will be sufficient to fund operations for an estimated 6 months.
Cardia expects that the assets of VLS, which will become assets of Cardia
following the merger, will increase Cardia's liquidity and be sufficient to fund
operations for an estimated additional 6 months based on the same assumptions.
Cardia intends to raise additional capital in the next 6 to 12 months through
the issuance of equity or debt securities or through bank debt, or a combination
of these means.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Cardia's management believes that the market risk association with its
market risk sensitive instruments as of June 30, 1999 is not material, and
therefore, disclosure is not required.
38
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of Cardia are or will be as
follows:
PRINCIPAL OCCUPATION
NAME AND AGE AND OTHER DIRECTORSHIPS
------------ -----------------------
Joseph A. Marino Chairman, Chief Executive Officer,
(47) President, Treasurer and Director of Cardia
since November 1998; Chairman of Applied
Biometrics, Inc. from 1994 to June 1999 and
Chief Financial Officer from 1993 to 1996.
Peter Buonomo Vice President of Cardia since November
(38) 1998; Vice President of Sales and Marketing
of Applied Biometrics, Inc. from 1996 to
March 1999, Vice President of Marketing
since 1995 and Director of Marketing from
1994 to 1995.
Thomas E. Brust Director of Cardia since November 1998;
(40) Chairman and Chief Executive Officer of
Micropure Medical, Inc., a medical device
manufacturer, since 1992.
Christopher J. Turnbull Director of Cardia since January 1, 1999;
(43) Director of St. Paul Medical Inc., a
disposable medical device manufacturer,
since 1993; Interim President of Oxboro
Medical International, a medical device
manufacturer, since 1998.
Peter R. Peterson(1) Chairman and Chief Executive Officer of
(65) Video Learning Systems, Inc. since 1982;
Director of PPT Vision, Inc., a
manufacturer, marketer and integrator of
machine vision systems; Secretary and
Director of Electro-Sensors, Inc., a
manufacturer and distributor of industrial
production monitoring and process control
systems. Mr. Peterson served as Secretary of
Electro-Sensors since 1973 and served as
Chairman of the Board from 1969 to 1989. He
is also President of P. R. Peterson, Inc., a
venture capital firm where he has served for
over five years.
- ---------------------
(1) Peter R. Peterson is not a current executive officer or director of
Cardia. It is expected, however, that Mr. Peterson, a director and
officer of VLS, will be elected to the board of directors of Cardia
upon the completion of the merger.
39
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth certain information regarding
compensation to be paid during fiscal year 1999 to Cardia's Chief Executive
Officer. No other executive officer of Cardia will receive salary in excess of
$100,000 during 1999:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
------------------- -------------------
SECURITIES
UNDERLYING
NAME AND PRINCIPAL POSITION FISCAL YEAR SALARY OPTIONS(1)
- --------------------------- ----------- ------ ----------
<S> <C> <C> <C>
Joseph A. Marino, Chief Executive Officer 1999 $170,000 50,000
</TABLE>
- --------------------------
(1) Number of shares of Cardia common stock subject to options granted
during the year indicated.
DIRECTOR COMPENSATION
Directors are not currently paid fees for attending meetings. All
directors are reimbursed for their travel expenses incurred in attending board
meetings.
STOCK OPTION PLAN AND RELATED INFORMATION
As of January 27, 1999, the board of directors and sole shareholder of
Cardia adopted the Cardia, Inc. 1999 Omnibus Stock Incentive Plan to provide for
the granting of stock-based incentives to officers, key employees and directors
of Cardia. The plan permits the granting of incentive stock options meeting the
requirements of Section 422 of the Internal Revenue Code of 1986, as amended,
non-qualified stock options which do not meet the requirements of such section,
stock appreciation rights, restricted stock grants and deferred stock grants.
The plan also contains provisions that permit an automatic reload of certain
options if the original grant includes a reload feature. Cardia has reserved
200,000 shares of its common stock for issue in connection with awards granted
pursuant to the plan. As of June 30, 1999, Cardia has outstanding options to
purchase an aggregate of 132,500 shares of its common stock.
40
<PAGE>
The following table sets forth certain information as to options
granted to the Chief Executive Officer of Cardia as of June 30, 1999:
<TABLE>
<CAPTION>
OPTION GRANTS
PERCENT OF TOTAL
NAME OF SECURITIES OPTIONS
UNDERLYING GRANTED TO EXERCISE OR BASE
OPTIONS EMPLOYEES PRICE
NAME GRANTED IN FISCAL YEAR DOLLAR/SHARE EXPIRATION DATE
- ---- ------- -------------- ------------ ---------------
<S> <C> <C> <C> <C>
Joseph A. Marino 50,000(1) 100% $1.10 01/01/99
</TABLE>
- --------------------------
(1) All of Mr. Marino's options are currently exercisable.
The following table sets forth certain information as to options held
by the Chief Executive Officer of Cardia as of June 30, 1999:
<TABLE>
<CAPTION>
AGGREGATE OPTION EXERCISES
AND OPTION VALUES
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Joseph A. Marino 50,000 0 $0(1) --
</TABLE>
- --------------------------
(1) The value of the exercisable options is equal to the difference between
the subscription price in the rights offering of $1.00 per share
undertaken in February of 1999 by Cardia and the option exercise price
of $1.10 per share multiplied by the number of shares subject to
options.
INDEMNIFICATION AND WAIVER OF DIRECTOR LIABILITY
The Minnesota Business Corporation Act provides that officers and
directors of Cardia have the right to indemnification from Cardia for liability
arising out of certain actions. Such indemnification may be available for
liabilities arising in connection with the distribution and the rights offering.
Insofar as indemnification for liabilities arising under the Securities Act of
1933, as amended, may be permitted to directors, officers or persons controlling
Cardia pursuant to such indemnification provisions, Cardia has been advised that
in the opinion of the Securities and Exchange Commission, such indemnification
is against public policy as expressed in the Securities Act and is therefore
unenforceable.
Cardia has adopted in its articles of incorporation a provision which
limits personal liability for a breach of the fiduciary duty of its directors,
to the extend provided by the Minnesota Business Corporation Act. Such provision
eliminated the personal liability of directors for damages occasioned by breach
of fiduciary duty, except for liability based on the director's duty of loyalty
to Cardia, liability for acts or omissions not in good faith, or which involve
intentional misconduct or a knowing violation of law, liability based on
payments of improper dividends, liability based on violations of state
securities laws, and liability for acts occurring prior to the date such
provision was added.
41
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information as of June 30, 1999,
with respect to the beneficial ownership of Cardia's common stock by (1) all
persons known by Cardia to be the beneficial owners of more than 5% of the
outstanding common stock of Cardia, (2) each executive officer and director of
Cardia, and (3) all executive officers and directors of Cardia as a group.
<TABLE>
<CAPTION>
NAME AND ADDRESS OF
BENEFICIAL OWNERS SHARES OWNED
----------------- ------------
NUMBER OF SHARES PERCENTAGE
BENEFICIALLY OWNED OF CLASS
------------------ --------
<S> <C> <C>
Cede & Co..................................................... 595,719 59.6%
c/o Depository Trust Co.
P.O. Box 20
Bowling Green Station
New York, New York 10004
Joseph A. Marino.............................................. 330,433(1)(2) 31.5%
13754 Frontier Court
Burnsville, Minnesota 55337
David B. Johnson.............................................. 86,588(3) 8.7%
Miller Johnson & Kuehn Inc.
5500 Wayzata Blvd., Suite 800
Minneapolis, Minnesota 55416
Thomas E. Brust............................................... 10,000(1)(4) **
Christopher J. Turnbull....................................... 10,000(1)(5) **
Peter Buonomo................................................. 25,000(6) 2.4%
Peter R. Peterson............................................. (7) (8)
All executive officers and directors as a group (4 persons)... 375,433(2)(4)(5)(6) 34.3%
</TABLE>
- -------------------------------
** Less than 1%.
(1) Current director of Cardia, Inc.
(2) Includes 50,000 shares which could be purchased by Mr. Marino under stock
options exercisable within sixty (60) days. Also includes 2,773 shares held
by Mr. Marino's daughter, Anna M. Marino, and 2,773 shares held by Mr.
Marino's son, Joseph A. Marino III, the beneficial ownership of all of such
shares is disclaimed.
(3) Based upon the Schedule 13G filed with the Securities and Exchange
Commission on April 27, 1999. Includes 54,420 and 63 shares owed
respectively by Betty Johnson and Todd Johnson, wife and son of David B.
Johnson. Mr. Johnson has sole voting and dispositive power with respect to
30,451 shares and shared voting and dispositive power with respect to
56,137 shares.
(4) Includes 10,000 shares which could be purchased by Mr. Brust under stock
options exercisable within sixty (60) days of the date hereof.
42
<PAGE>
(5) Includes 10,000 shares which could be purchased by Mr. Turnbull under stock
options exercisable within sixty (60) days of the date hereof.
(6) Includes 25,000 shares which could be purchased by Mr. Buonomo under stock
options exercisable within sixty (60) days of the date hereof.
(7) Mr. Peterson will own approximately 39,475 shares of the outstanding shares
of Cardia common stock after giving effect to the shares issued in
connection with the merger. Calculation includes shares owned by a
subsidiary of Electro-Sensors, Inc., of which Mr. Peterson is a director
and controlling shareholder. See "Information with Respect to VLS -
Principal Shareholders" on page 46.
(8) Mr. Peterson will own approximately 3.2% of the outstanding shares of
Cardia common stock after giving effect to the shares issued in connection
with the merger. Calculation includes shares owned by a subsidiary of
Electro-Sensors, Inc., of which Mr. Peterson is a director and controlling
shareholder. See "Information with Respect to VLS - Principal Shareholders"
on page 46.
43
<PAGE>
INFORMATION WITH RESPECT TO VLS
BUSINESS OF VLS
Video Learning Systems, Inc. was incorporated as a Minnesota corporation on
December 7, 1982. From 1982 to 1989, VLS was engaged in the development,
production, manufacturing and marketing of "self-help," "how-to" video tapes
covering a variety of topics for the home video market. VLS focused its initial
efforts on researching the video market and then became a co-producer for a
number of video tapes, including exercise and training tapes and tapes for
teaching preschool children. VLS ceased all operations relating to its videotape
business in approximately 1989 and has not engaged in active operations since
that time.
VLS currently has no business or assets other than cash, cash equivalents
and a note receivable. It has no employees or operations of any kind. VLS'
management shall not be a part of the management organization of Cardia, except
for Peter R. Peterson, who is expected to become a member of Cardia's board of
directors.
MARKET FOR VLS' COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
MARKET INFORMATION
As of the date of this prospectus/proxy statement, there is no public
trading market in the United States or elsewhere for the VLS common stock. Upon
the consummation of the merger, the Cardia common stock received by holders of
VLS common stock is expected to be eligible for quotation in the "pink sheets"
and approved for trading on the local over-the-counter market under the symbol
"CRDI." There can be, and is, no assurance that market makers will make or
maintain a market in the Cardia common stock or that, even if a market is made
and maintained in the stock, that the Cardia common stock will trade at prices
deemed attractive or reasonable to the present shareholders of VLS.
HOLDERS
The approximate number of holders of record of VLS common stock at June
30, 1999 was 73. VLS believes that these recordholders represent more than 100
beneficial owners.
DIVIDEND POLICY
VLS has no operations or significant earnings and has never paid
dividends on its common stock. Upon the consummation of the merger, there are no
restrictions that would, or are likely to, limit the ability of Cardia to pay
dividends on its capital stock, but Cardia has no plans to pay dividends in the
foreseeable future and intends to use earnings for business expansion purposes.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussions should be read in conjunction with VLS'
financial statements and the notes appearing elsewhere in this document.
OPERATIONS
VLS was incorporated as a Minnesota corporation on December 7, 1982.
From 1982 to 1989, VLS was engaged in the development, production, manufacturing
and marketing of "self-help" and "how-to" video tapes covering a variety of
topics for the home video market. VLS ceased operations in approximately 1989
and has not engaged in any active operations since that time.
44
<PAGE>
VLS currently has no active business or significant assets other than
cash, cash equivalents and a note receivable. The company's only income during
the last four fiscal years was attributable to certain interest and dividend
income. VLS has no employees, facilities or operations of any kind.
RESULTS OF OPERATIONS
REVENUES. Revenues for the quarter ended June 30, 1999 were $14,898 and
derived solely from interest and dividend income for the period. VLS has derived
no revenue from operations during the first quarter of 1999 or in the last three
fiscal years ended December 31, 1998, 1997 and 1996.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. VLS expended $6,032 in
the first six months of 1999 on selling, general and administrative expenses.
The majority of these costs are attributable to various accounting and
administrative expenses.
NET INCOME. VLS recognized net income of $8,866 in the first six months
of 1999.
LIQUIDITY AND CAPITAL RESOURCES
VLS' liquidity as of March 31, 1999 consisted of approximately $371,281
in cash. VLS believes that this liquidity will be adequate for its foreseeable
financial commitments.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
VLS' management believes that the market risk associated with its
market risk sensitive instruments as of June 30, 1999 is not material, and
therefore, disclosure is not required.
45
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information as of June 30, 1999,
with respect to the beneficial ownership of VLS' common stock by (1) all persons
known by VLS to be the beneficial owners of more than 5% of the outstanding
common stock of VLS, (2) each executive officer and director of VLS, and (3) all
executive officers and directors of VLS as a group.
<TABLE>
<CAPTION>
NAME AND ADDRESS OF
BENEFICIAL OWNERS SHARES OWNED
----------------- ------------
NUMBER OF PERCENTAGE
BENEFICIALLY SHARES OF CLASS
------------------- --------
<S> <C> <C>
Cede & Co...................................................... 309,129 29.1%
P.O. Box 20
Bowling Green Station
New York, New York 10274
Peter R. Peterson.............................................. 209,975(1)(2) 19.7%
6111 Blue Circle Drive
Minnetonka, Minnesota 55343-9108
R & J Co....................................................... 107,028 10.0%
R J Steichen & Company
1 Financial Plz., Suite 100
120 South 6th Street
Minneapolis, Minnesota 55402-1803
Joseph A. Marino............................................... 75,000(3) 7.0%
13754 Frontier Court
Burnsville, Minnesota 55337
Van Clemens & Co............................................... 55,447 5.2%
5708 Olinger Blvd.
Minneapolis, Minnesota 55436-1912
Paul R. Peterson .............................................. 14,900(1) 1.4%
6111 Blue Circle Drive
Minnetonka, Minnesota 55343-9108
All executive officers and directors as a group (2 persons).... 224,875(2) 21.1%
</TABLE>
- -----------------
(1) Member of the board of directors of VLS.
(2) Includes 46,875 shares owned by a subsidiary of Electro-Sensors, Inc., of
which Mr. Peterson is a director and controlling shareholder.
(3) Member of the board of directors of Cardia.
46
<PAGE>
EXECUTIVE COMPENSATION AND OTHER MATTERS
EXECUTIVE COMPENSATION
No officer of VLS received any salary or other compensation at any time
during the fiscal years ending December 31, 1998, 1997, 1996 and no officer of
VLS will receive any salary or other compensation during 1999.
OPTION/SAR GRANTS
VLS has not issued any stock options or granted any stock appreciation
rights at any time during the last three years. Stock options, if any, granted
during any period prior to three years have either been exercised or expired.
OPTION/SAR EXERCISES
VLS has not issued any stock options or granted any stock appreciation
rights at any time during the last three years. Stock options, if any, granted
during any period prior to three years have either been exercised or expired.
DIRECTOR COMPENSATION
Directors of VLS are not paid any compensation.
COMPARISON OF RIGHTS OF HOLDERS OF CARDIA COMMON STOCK
AND HOLDERS OF VLS COMMON STOCK
DESCRIPTION OF CARDIA CAPITAL STOCK
The following summary of the material terms of the capital stock of
Cardia is not complete and is subject to and qualified in its entirety by
reference to Cardia's articles of incorporation and bylaws, copies of which are
included as exhibits to documents incorporated by reference to the registration
statement of which this proxy statement/prospectus is a part.
CARDIA COMMON STOCK
Cardia is authorized to issue 10,000,000 shares of common stock, par
value $.01 per share. There are currently 1,000,081 shares of Cardia common
stock issued and outstanding and approximately 79 holders of record of Cardia
common stock. The holders of Cardia common stock are entitled to one vote for
each share of common stock held on all matters submitted to a vote of
shareholders. The holders of Cardia common stock do not have cumulative voting
rights in the election of directors. The holders of Cardia common stock are
entitled to receive ratably such dividends, if any, as may be declared by the
Cardia board of directors out of legally available funds, subject to the rights
of the holders of any outstanding Cardia preferred stock to receive preferential
dividends. In the event of liquidation, dissolution or winding up of Cardia, the
holders of Cardia common stock are entitled to share ratably in all assets of
Cardia available for distribution to shareholders after payment of all
obligations of Cardia and the aggregate liquidation preference (including all
accrued and unpaid dividends) of any outstanding Cardia preferred stock.
The holders of Cardia common stock have no preemptive, subscription,
redemptive or conversion rights. The outstanding shares of Cardia common stock
are, and the Cardia common stock to be issued in the merger will
47
<PAGE>
be, validly issued, fully paid and nonassessable.
CARDIA PREFERRED STOCK
The board of directors of Cardia have the discretion to issue 1,000,000
shares of preferred stock, par value $.01 per share. No shares of preferred
stock are currently issued and outstanding. The board of directors of Cardia has
the authority to prescribe for each series of Cardia preferred stock it
establishes the number of shares in that series, the dividend rate, and the
voting rights, conversion privileges, redemption, sinking fund and liquidation
rights, if any, and any other rights, preferences, qualifications and
limitations of a particular series. The issuance of Cardia common stock could
decrease the amount of earnings and assets available for distribution to the
holders of Cardia common stock or adversely affect the rights and powers,
including the voting rights, of the holders of Cardia common stock.
Under certain circumstances, Cardia preferred stock could be used to
create voting impediments or deter persons seeking to effect a takeover or
otherwise gain control of Cardia in a transaction which holders of some or a
majority of Cardia common stock may deem to be in their best interests. Such
shares of Cardia preferred stock could be sold in public or private transactions
to purchasers who might support the Cardia board of directors in opposing a
takeover bid that the Cardia board of directors determines not to be in the best
interests of Cardia and its shareholders. In addition, the Cardia board of
directors could authorize holders of a class or series of preferred stock to
vote, either separately as a class or together with the holders of Cardia common
stock, on any merger, sale, or exchange of assets by Cardia or any other
extraordinary corporate transaction. The ability to issue such Cardia preferred
stock might have the effect of discouraging an attempt by another person or
entity, through the acquisition or a substantial number of shares of Cardia
common stock, to acquire control of Cardia with a view to imposing a merger,
sale of all or any part of the assets or a similar transaction, because the
issuance of new shares could be used to dilute the stock ownership of such
person or entity.
Cardia has no present plans to issue any Cardia preferred stock.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Cardia common stock is Norwest
Bank Minnesota, N.A.
COMPARATIVE RIGHTS OF CARDIA AND VLS SHAREHOLDERS
Upon the consummation of the merger, the shareholders of VLS will
become shareholders of common stock of Cardia. Both VLS and Cardia are
incorporated in the State of Minnesota and governed by the Minnesota Business
Corporation Act. The rights of the shareholders of Cardia and VLS are also
governed by their respective articles of incorporation and bylaws. The following
is a brief summary of certain differences between the rights of Cardia
shareholders and the rights of VLS shareholders. The summary set forth below is
not intended to be complete description of all of the differences between the
rights of shareholders of VLS and the rights of shareholders of Cardia and is
qualified by reference to Minnesota law, the articles and bylaws of VLS, and the
articles and bylaws of Cardia.
PERCENTAGE OF VOTING STOCK AND INFLUENCE OVER AFFAIRS
Upon completion of the merger, the percentage ownership of Cardia by
each former VLS shareholder will be substantially less than that shareholder's
current percentage ownership of VLS. Accordingly, former VLS shareholders will
have significantly smaller voting influence over the affairs of Cardia than they
currently enjoy over the affairs of VLS.
48
<PAGE>
PRESENCE OF CARDIA PREFERRED STOCK
Cardia's articles of incorporation provide that shares of preferred
stock may be issued with terms, preferences and rights determined by its board
of directors without stockholder approval. See "Description of Cardia Capital
Stock - Cardia Preferred Stock." VLS is not authorized to issue preferred stock,
but is allowed to issue multiple classes of common stock with such terms,
preferences and rights as the board of directors of VLS may determine from time
to time. Currently, there is only one class of VLS common stock and all holders
thereof have equal rights in all respects.
CLASSIFICATION, REMOVAL AND ELECTION OF DIRECTORS
Cardia's bylaws provide for a classified board of directors, under
which directors are elected to three-year terms, with one-third of the directors
being elected each year. VLS' articles and bylaws do not similarly classify its
board of directors, and directors are elected each year for a one-year term.
Both Cardia's and VLS' bylaws provide for newly created directorships resulting
from an increase in the authorized number of directors and any vacant
directorships may be filled by a majority of the directors then in office.
VLS' bylaws provide that directors may be removed from office, with or
without cause, by the affirmative vote of the majority of the other directors.
The Minnesota Business Corporation Act enables a majority of Cardia's board of
directors to remove directors from office in a similar manner.
The provisions of Cardia's articles regarding directors will be subject
to the terms of the certificate of designation or other instrument creating any
class or series of preferred stock giving the holders of such class or series of
preferred stock the right, voting separately as a class, to elect one or more
directors (such as is often required by the terms of preferred stock in the
event that dividend payments are in arrears for a period of time). See "Cardia
Capital Stock - Cardia Preferred Stock."
These provisions of Cardia's articles regarding classification, removal
and nomination of directors afford some assurance of stability in the
composition of Cardia's board of directors, but may discourage or deter attempts
by individuals to take control of Cardia by electing their own slate of
directors. To the extent that potential acquirors of Cardia stock are deterred
by the classified board, such provision also may deter certain mergers, tender
offers or other future takeover attempts which some or a majority of holders of
Cardia common stock may deem to be in their best interests. In addition, the
classified board would delay shareholders who do not favor the policies of
Cardia's board of directors from removing a majority of the board of directors
for two years, unless they can obtain the requisite vote.
SHAREHOLDER VOTE REQUIRED FOR CERTAIN TRANSACTIONS
Neither Cardia's nor VLS' governing documents contain any provisions
that would require greater than a majority of its respective shareholders to
approve mergers, consolidations, sales of a substantial amount of assets or
other similar transactions.
49
<PAGE>
RIGHT TO CALL SPECIAL MEETING OF SHAREHOLDERS
Under the bylaws of VLS, a special meeting of shareholders
may be called by certain officers, two or more directors or shareholders holding
at least 10% of the voting power of all shares of capital stock entitled to
vote. Cardia is subject to a similar provision of the Minnesota Business
Corporation Act for calling a special meeting of shareholders.
ADVANCE NOTICE OF SHAREHOLDER PROPOSALS AND DIRECTOR NOMINATIONS
Under Cardia's and VLS' bylaws, advance notice is required of
shareholder proposals or director nominations to be considered at a meeting of
the shareholders.
ACTION BY WRITTEN CONSENT
Minnesota law provides that any action of a Minnesota corporation
permitted or required by law to be taken by shareholders at a meeting may be
taken without a meeting and without prior notice if a written consent is signed
by all of the holders of outstanding voting stock of the corporation.
LIABILITY OF DIRECTORS AND OFFICERS
Cardia's articles and bylaws generally exempt directors and officers
from personal liability to the corporation or its shareholders from monetary
damages for breach of fiduciary duty as a director to the fullest extent
permitted by Minnesota law. VLS' articles and bylaws contain similar provisions.
AMENDMENT OF GOVERNING DOCUMENTS
Minnesota law provides that an amendment to the articles of
incorporation requires the affirmative vote of the holders of a majority of the
shares present and entitled to vote unless a larger affirmative vote is required
by the corporation's articles. Neither Cardia's nor VLS' articles of
incorporation contain any provisions that require a larger affirmative vote in
order to amend their articles.
The Cardia and VLS bylaws provide that the Cardia and VLS board of
directors have the power to make, amend, alter and repeals the bylaws upon the
majority vote of their boards of directors, subject to the power of their
respective shareholders to enact, change or repeal such bylaws; provided,
however, that the VLS bylaws do not permit its board of directors to adopt,
amend or repeal any bylaws fixing a quorum for meetings of shareholders,
prescribing procedures for removing directors or filling vacancies in the board,
or fixing the number of directors (except as may be done to increase the number
of directors) or their classification, qualifications or terms of office.
BUSINESS COMBINATIONS AND CONTROL SHARE ACQUISITIONS
Cardia is governed by Sections 302A.671 and 302A.673 of the Minnesota
Business Corporation Act. In general, Section 302A.671 provides that the shares
of a corporation acquired in a "control share acquisition" have no voting rights
unless voting rights are approved in a prescribed manner. A control share
acquisition is an acquisition, of beneficial ownership of shares that would,
when added to all other shares beneficially owned by the acquiring person,
entitle the acquiring person to have voting power of 20% or more in the election
of directors. In general, Section 302A.673 prohibits a public Minnesota
corporation from engaging in a "business combination" with an "interested
shareholder" for a period of four years after the date of the transaction in
which the person became an interested shareholder, unless the business
combination is approved in a prescribed manner. A business combination includes
any merger, asset sale or other transaction resulting in a financial benefit to
the interested shareholder. An interested shareholder is a person who is the
beneficial owner of 10% or more of the corporation's
50
<PAGE>
voting stock or who is an affiliate or associate of the corporation and at any
time within four years prior to the date in question was the beneficial owner of
10% or more of the corporation's voting stock. These provisions of the Minnesota
law could delay, defer or prevent a change in control of Cardia.
INDEPENDENT ACCOUNTANTS
The financial statements of Cardia included herein as of December 31,
1998 have been audited by PricewaterhouseCoopers LLP, independent public
accountants, as set forth in their report thereon included in this document and
registration statement.
The financial statements of VLS included herein for the years ended
December 31, 1998 and 1997 have been audited by Casey, Menden, Faust & Nelson,
P.A., independent public accountants, as set forth in their report thereon
included in this document and registration statement.
LEGAL MATTERS
The validity of the Cardia common stock to be issued in the merger has
been passed upon for Cardia by Lindquist & Vennum P.L.L.P., Minneapolis,
Minnesota. Patrick Delaney, a partner in Lindquist & Vennum, is the Secretary of
Cardia and a shareholder of VLS.
REPRESENTATIVES OF INDEPENDENT PUBLIC ACCOUNTANTS OF VLS
Representatives of Casey, Menden, Faust & Nelson, P.A. expect to be
present at the VLS special meeting. While these representatives have stated that
they do not plan to make a statement at the meeting, they will be available to
respond to appropriate questions from shareholders in attendance.
51
<PAGE>
INDEX TO FINANCIAL STATEMENTS - CARDIA, INC.
PAGE
----
Report of Independent Accountants............................................F-2
Balance Sheets as of December 31, 1997 and 1998, and June 30, 1999
(unaudited)...............................................................F-3
Statements of Operations for the period ended December 31, 1997, the
year ended December 31, 1998, and the six month periods ended
June 30, 1998 and 1999 (unaudited)........................................F-4
Statement of Advances by Parent and Shareholders' Equity for the period
ended December 31, 1997 and the year ended December 31, 1998..............F-5
Statements of Cash Flows for the period ended December 31, 1997, the
year ended December 31, 1998, and the six month periods ended
June 30, 1998 and 1999 (unaudited)........................................F-6
Notes to Financial Statements................................................F-7
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Shareholders of
Cardia, Inc.
In our opinion, the accompanying balance sheets and the related statements of
operations, of advances by parent and shareholders' equity and of cash flows
present fairly, in all material respects, the financial position of Cardia, Inc.
(the Company; formerly the Transcatheter Closures Business of Applied
Biometrics, Inc.) as of December 31, 1998 and 1997 and the results of its
operations and its cash flows for the year ended December 31, 1998 and the
period from November 2, 1997 (inception) to December 31, 1997, in conformity
with generally accepted accounting principles. 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 of these statements in accordance with generally accepted auditing
standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/PricewaterhouseCoopers LLP
PRICEWATERHOUSECOOPERS LLP
Minneapolis, Minnesota
March 18, 1999
F-2
<PAGE>
CARDIA, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1999
ASSETS 1997 1998 (UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ -- $ 500 $ 484,285
Accounts receivable -- 92,917 143,031
Inventories -- 50,888 38,200
Prepaid expenses and other current asset -- 11,285 1,274
----------- ----------- -----------
Total current assets -- 155,590 666,790
Property and equipment, net -- 27,371 104,143
Intangible assets 100,000 83,332 74,998
----------- ----------- -----------
Total assets $ 100,000 $ 266,293 $ 845,931
=========== =========== ===========
LIABILITIES AND NET INVESTMENT BY
APPLIED BIOMETRICS, INC.
Current liabilities:
Trade accounts payable $ -- $ 63,651 $ 22,692
Accrued expenses -- -- (421)
----------- ----------- -----------
Total current liabilities -- 63,651 22,271
Commitments and contingencies
Advances by parent and shareholders' equity:
Preferred Stock (1,000,000 shares
authorized, no shares outstanding
at June 30, 1999) -- -- --
Common Stock (10,000,000 shares
authorized, 1,000,081 shares
outstanding at June 30, 1999) -- -- 10,000
Additional paid in capital -- -- 2,334,667
Advances from Applied Biometrics, Inc. 557,866 1,496,894 --
Accumulated deficit (457,866) (1,294,252) (1,521,007)
----------- ----------- -----------
Net investment by Applied Biometrics, Inc. 100,000 202,642 823,660
----------- ----------- -----------
Total liabilities and net investment by
Applied Biometrics, Inc. $ 100,000 $ 266,293 $ 845,931
=========== =========== ===========
</TABLE>
See accompanying notes to the financial statements.
F-3
<PAGE>
CARDIA, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE PERIOD FROM
NOVEMBER 2, 1997 FOR THE SIX
(INCEPTION) TO YEAR ENDED MONTH PERIOD ENDED
December 31, 1997 December 31, 1998 June 30,
1998 1999
(unaudited)
<S> <C> <C> <C> <C>
Net sales $ -- $ 167,240 $ 37,440 $ 444,003
Cost of sales -- 33,652 $ 7,484 $ 128,011
------------ ------------ ------------ ------------
Gross profit -- 133,588
Operating expenses:
Selling, general and administrative 16,409 564,826 241,783 524,683
Research and development 405,148 207,427 18,062
Acquisition of in-process research
and development 441,457 --
------------ ------------ ------------ ------------
457,866 969,974 449,210 542,745
------------ ------------ ------------ ------------
Net loss $ (457,866) $ (836,386) $ 419,254 $ 226,753
============ ============ ============ ============
Net loss per share
Basic and Fully Diluted $ (1.22) $ (2.23) $ (1.12) $ (0.33)
Weighted Average Shares
Outstanding 375,000 375,000 375,000 690,613
</TABLE>
See accompanying notes to the financial statements.
F-4
<PAGE>
CARDIA, INC.
STATEMENT OF ADVANCES BY PARENT AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL ADVANCES
COMMON PAID-IN FROM APPLIED ACCUMULATED SHAREHOLDER
STOCK CAPITAL BIOMETRICS, INC. DEFICIT EQUITY
------------ ------------ ---------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
November 2, 1997 (inception) $ -- $ -- $ -- $ -- $ --
Purchase of the Transcatheter
Closure Product Line 557,866 -- 557,866
Net Loss -- (457,866) (457,866)
------------ ------------ ------------
Balances at December 31, 1997 557,866 (457,866) 100,000
Advances by Applied
Biometrics, Inc. 939,028 -- 939,028
Net Loss -- (836,386) (836,386)
------------ ------------ ------------
Balances at December 31, 1998 $ 1,496,894 $ (1,294,252) $ 202,642
============ ============ ============
Advance by
Applied Biometrics, Inc.
(unaudited) 222,773 222,773
Distribution of interest in
Cardia from Applied
Biometrics, Inc.
(unaudited) 3,750 1,715,912 (1,719,667) -- --
Sale of Common Stock
(unaudited) 6,250 618,750 -- -- 625,000
Net loss (unaudited) -- -- -- (226,755) (226,755)
------------ ------------ ------------ ------------ ------------
Balance at June 30, 1999
(unaudited) $ 10,000 $ 2,334,667 $ -- $ (1,521,007) $ 823,660
============ ============ ============ ============ ============
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
CARDIA, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE PERIOD FROM FOR THE SIX MONTH
NOVEMBER 2, 1997 PERIOD ENDED
(INCEPTION) TO YEAR ENDED JUNE 30,
DECEMBER 31, 1997 DECEMBER 31, 1998 1998 1999
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (457,866) $ (836,386) $ (419,258) $ (226,753)
Adjustments to reconcile net loss to net cash
from operating activities:
Non-cash acquisition of in-process research
and development 441,457 -- -- --
Depreciation and amortization -- 19,709 8,334 13,090
Cash flows provided by (used for) changes in:
Accounts receivable -- (92,917) (21,942) (50,114)
Inventories -- (50,888) (40,000) 12,688
Prepaid expenses and other current assets -- (11,285) -- 10,011
Accounts payable -- 63,651 16,826 41,380
----------- ----------- ----------- -----------
Net cash flows used for operating activities (16,409) (908,116) (456,040) (282,458)
----------- ----------- ----------- -----------
Cash flows from investing activities:
Cash expended for purchase of product line (31,457) -- -- --
Purchase of property and equipment -- (30,412) (5,225) (81,528)
----------- ----------- ----------- -----------
Net cash flows used for investing activities (31,457) (30,412) (5,225) (81,528)
----------- ----------- ----------- -----------
Cash flows from financing activities:
Proceeds from issuance of common stock -- -- -- 625,000
Cash received from Applied Biometrics, Inc. 47,866 939,028 461,265 222,771
----------- ----------- ----------- -----------
Net cash flows provided by financing activities 47,866 939,028 461,265 847,771
----------- ----------- ----------- -----------
Net increase in cash -- 500 -- 483,785
Cash and cash equivalents:
Cash, beginning of period -- -- -- 500
----------- ----------- ----------- -----------
Cash, ending of period $ -- $ 500 $ -- $ 500
=========== =========== =========== ===========
</TABLE>
See accompanying notes to the financial statements.
F-6
<PAGE>
CARDIA, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND OPERATIONS
BACKGROUND
Cardia, Inc. (Cardia or the Company) was formed in October of 1998 as a
subsidiary of Applied Biometrics, Inc. (ABI). Prior to that time, the entity was
operated as the Transcatheter Closures Business (the Business) of ABI. Cardia
was formed to develop, manufacture, and market Transcatheter Closure Devices
(TCD's) which are based on intellectual property rights ABI acquired in November
1997.
TCD's are a new generation of implantable device technologies which are
delivered through a catheter to permanently repair certain cardiac defects in
children and adults.
In December 1998, the Board of Directors of ABI approved a plan to distribute
ABI's interest in the Company as a dividend to the shareholders of ABI (the
Distribution). Under the plan, ABI shareholders received one share of Cardia for
every 11.563 shares of ABI common stock. The Distribution to shareholders
occurred on February 2, 1999, with a total distribution of 375,000 shares.
ACQUISITION OF TECHNOLOGY
ABI acquired the rights to the TCD technology in an acquisition consummated in
November 1997. The purchase price for the acquired technology was approximately
$542,000 and was comprised of 85,000 shares of ABI stock and $32,000 of related
acquisition costs. The acquired technologies consisted of a pediatric product
which has been subsequently market released internationally on a limited basis
and rights to another product with therapeutic applications to adults which
required substantial additional development. The purchase price allocation
included approximately $100,000 to capitalizable intangible assets related to
the developed product and $442,000 to in-process research and development which
was charged to expense in 1997 as the underlying research and development
projects had not reached technological feasibility and had no alternative future
use.
The purchase agreement also requires the payment of royalties equal to 3% of the
net sales price of Vessel/Septal Occluder devices sold, payable on a quarterly
basis for a period of six years.
BASIS OF PRESENTATION
The accompanying financial statements include the specifically identifiable net
assets of the transcatheter closure operations of ABI and the results of
operations of that business from the point of ABI's acquisition of the
underlying technology in November 1997.
Costs related to functions performed by ABI have been charged to the Business.
Such costs allocated by the parent include certain general and administrative
costs such as personnel costs, legal costs and costs of the finance function.
These allocations of costs were determined in a manner which management
considers to reflect the incremental costs of providing these services. The
terms of these transactions and allocations of costs were
F-7
<PAGE>
determined between related parties and may therefore differ from terms which
would have occurred between wholly unrelated parties or had the Business
operated as a completely autonomous entity since inception.
The Business' financing requirements have been funded by Applied Biometrics,
Inc. No interest expense has been allocated or charged to the Business for
financing provided by ABI.
The financial information included herein may not necessarily be indicative of
the financial position, results of operations or cash flows of the Business in
the future or what the financial position, results of operations or cash flows
would have been if the Business had been a separate, independent company during
the periods presented.
INTERIM FINANCIAL DATA (UNAUDITED)
The financial information presented as of June 30, 1999 and for each of the
six-month periods ended June 30, 1999 and 1998, including related information
set forth in the notes to financial statements, is unaudited. In the opinion of
management, this financial information reflects the adjustments necessary for a
fair presentation of the financial information for such periods. These
adjustments consist of normal, recurring items. The results of operations for
the six-month period ended June 30, 1999 should not necessarily be taken as
indicative of the results of operations that may be expected for the entire
year.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
The Company operates in one industry segment and is engaged in the development,
manufacturing and marketing of Transcatheter Closure Devices.
FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS
The Business' financial instruments consist of short-term trade receivables and
payables for which the current carrying amounts approximate fair market value.
USE OF ESTIMATES
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from these estimates.
CASH AND CASH EQUIVALENTS
Cash equivalents are highly liquid marketable securities with original
maturities of three months or less.
INVENTORY
Inventory is stated at the lower of cost (first-in-first-out basis) or market.
F-8
<PAGE>
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost with depreciation computed using the
straight-line method over the estimated useful lives of the assets. Expenditures
for additions and improvements are capitalized while repair and maintenance
costs are expensed as incurred.
INTANGIBLE ASSETS
The cost of acquired intangible assets is capitalized and amortized on a
straight-line basis over an estimated useful life of six years. The
recoverability of unamortized intangible assets is assessed on an ongoing basis
by comparing discounted future cash flows from the related product to net book
value.
REVENUE RECOGNITION
Revenue is recognized upon shipment of goods to customers.
CONCENTRATION OF CREDIT RISK
The Company does not believe it is subject to a concentration of credit risk.
RESEARCH AND DEVELOPMENT
The costs of research and development are expensed as incurred.
INCOME TAXES
Income taxes are accounted for using the liability method. The liability method
requires the recognition of deferred tax assets and liabilities for differences
between the financial reporting and income tax bases of the Company's assets and
liabilities.
NET LOSS PER SHARE
Earnings (loss) per share is computed by dividing net loss by the
weighted-average number of shares of common stock outstanding during the year.
For periods prior to the spin-off of Cardia from ABI, weighted-average shares
outstanding have been determined as if the distribution of shares in the
spin-off had occurred as of the inception of the Company. Common stock
equivalents, consisting of shares which might be issued upon exercise of stock
options are not included in weighted-average common shares for purposes of
determining diluted earnings per share in years where losses are reported since
their inclusion would be antidilutive. Pro forma loss per share is as follows:
1997 1998
Pro forma:
Basic and diluted loss per share $ (1.22) $ (2.23)
Shares used in computing pro forma loss per share 375,000 375,000
F-9
<PAGE>
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This standard
establishes accounting and reporting standards for derivative instruments and
hedging activities. The Company must adopt this standard no later than fiscal
year 2001. Management believes that adoption of SFAS No. 133 will not have a
material effect on the Company's financial statements.
3. PROPERTY AND EQUIPMENT
The cost of property and equipment and the estimated useful lives are as
follows:
ESTIMATED
USEFUL LIFE 1997 1998
Furniture and fixtures 5 years $ -- $ 7,496
Machinery and equipment 5 years -- 22,916
---------- ----------
-- 30,412
Less accumulated depreciation -- (3,041)
---------- ----------
$ $ 27,371
========== ==========
4. INTANGIBLE ASSETS
Intangible assets are comprised as follows:
ESTIMATED
USEFUL LIFE 1997 1998
Intangible assets 6 years $ 100,000 $ 100,000
Less accumulated amortization -- (16,668)
---------- ----------
$ 100,000 $ 83,332
========== ==========
5. STOCK OPTION PLAN
On January 27, 1999, the Board of Directors and sole shareholder of the Company
adopted the Cardia, Inc. 1999 Omnibus Stock Incentive Plan to provide for the
granting of stock-based incentives to officers, key employees and directors of
the Company. The Company has reserved 200,000 shares of its common stock for
issue in connection with awards granted pursuant to the plan. Subsequent to
December 31, 1998, the Company issued options to purchase an aggregate of
132,500 shares of its common stock at exercise prices varying from $1.00 to
$1.10 per share.
F-10
<PAGE>
6. INCOME TAXES
The Business has not been allocated any tax benefit on the results of its
operations since inception. As the Business was part of the consolidated tax
return of ABI until spin-off as a separate company in February 1999, no losses
prior to that date are available for carryforward to future periods.
At the spin-off date, the Company will have available net temporary differences
to offset taxable income in future periods. For tax purposes, all acquired
technology of the Business is capitalized and amortized over a life of 15 years.
Such future tax benefits approximate $140,000.
7. SUBSEQUENT EVENTS - CAPITALIZATION AND FINANCING
The Distribution of 375,000 shares of the Company's common stock to ABI
shareholders occurred on February 11, 1999. At that date, Cardia had authorized
10,000,000 shares of its $0.01 par value common stock. Concurrent with the
Distribution, the Company sold 125,000 shares of Cardia common stock at a price
of $1 per share to an officer of the Company.
Subsequent to the Distribution, the Company completed a rights offering of its
common stock to sell an aggregate of 500,000 shares of common stock at a
subscription price of $1 per share, on the basis of one right for each share of
Cardia stock held by a shareholder immediately after the Distribution.
F-11
<PAGE>
INDEX TO FINANCIAL STATEMENTS - VIDEO LEARNING SYSTEMS, INC.
PAGE
Independent Auditors' Report................................................F-13
Balance Sheets as of December 31, 1997 and 1998, and June 30, 1999
(unaudited).................................................................F-14
Statements of Income for the years ended December 31, 1997 and 1998, and
for the six month period ended June 30, 1999 (unaudited)....................F-15
Statements of Shareholders' Equity for the years ended December 31, 1997
and 1998, and for the period ended June 30, 1999 (unaudited)................F-16
Statements of Cash Flows for the years ended December 31, 1997 and
1998, and for the six month period ended June 30, 1999 (unaudited)..........F-17
Notes to Financial Statements...............................................F-18
F-12
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board
of Directors of Video Learning Systems, Inc.
Minnetonka, Minnesota
We have audited the accompanying balance sheets of Video Learning
Systems, Inc. as of December 31, 1998 and 1997, and the related statements of
income, shareholders' equity and cash flows for the years then ended. 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 financial position of Video Learning
Systems, Inc. as of December 31, 1998 and 1997, and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
/s/ Casey, Menden, Faust & Nelson, P.A.
July 7, 1999
F-13
<PAGE>
VIDEO LEARNING SYSTEMS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
------
June 30,
1997 1998 1999
----------- ----------- -----------
(unaudited)
<S> <C> <C> <C>
Current assets:
Cash $ 322,706 $ 389,922 $ 366,823
Refundable income taxes -- 4,458 4,458
Note receivable, current portion 44,301 47,503 79,631
Accounts receivable - interest -- -- 153
----------- ----------- -----------
Total current assets 367,007 441,883 451,065
----------- ----------- -----------
Video production costs 519,619 519,619 519,619
Less: accumulated amortization (519,619) (519,619) (519,619)
----------- ----------- -----------
Video production costs, net -- -- --
----------- ----------- -----------
Other assets:
Note receivable, net of current portion 200,019 152,516 97,051
----------- ----------- -----------
Total other assets 200,019 152,516 97,051
----------- ----------- -----------
$ 567,026 $ 594,399 $ 548,116
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable $ 235 $ 235 $ 3,235
Accounts payable - related party 58,149 58,149 --
----------- ----------- -----------
Total current liabilities 58,384 58,384 3,235
----------- ----------- -----------
Commitments and contingent liabilities -- -- --
Shareholders' equity:
Common stock, no par value, authorized
10,000,000 shares; 1,063,750 shares issued
and outstanding in 1998 and 1997 706,434 706,434 706,434
Contributed capital 18,000 18,000 18,000
Retained earnings (deficit) (215,792) (188,419) (179,553)
----------- ----------- -----------
Total shareholders' equity $ 508,642 536,015 544,881
----------- ----------- -----------
$ 567,026 $ 594,399 $ 548,116
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements
F-14
<PAGE>
VIDEO LEARNING SYSTEMS, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For the
Six Months
Ended
June 30,
1997 1998 1999
----------- ----------- -----------
(unaudited)
<S> <C> <C> <C>
Income:
Royalty income $ -- $ -- $ --
----------- ----------- -----------
Total income -- -- --
----------- ----------- -----------
Cost of sales:
Royalties -- -- --
----------- ----------- -----------
Total cost of sales -- -- --
----------- ----------- -----------
Gross profit -- -- --
Selling, general and administrative expenses 5,831 6,294 6,032
----------- ----------- -----------
Operating income (loss) (5,831) (6,294) (6,032)
----------- ----------- -----------
Other income:
Interest income 27,834 27,530 12,088
Dividend income 5,845 6,137 2,810
----------- ----------- -----------
Total other income 33,679 33,667 14,898
----------- ----------- -----------
Income before income taxes 27,848 27,373 8,866
Income tax expense (benefit) -- -- --
----------- ----------- -----------
Net income $ 27,848 $ 27,373 $ 8,866
=========== =========== ===========
Weighted average outstanding shares 1,063,750 1,063,750 1,063,750
=========== =========== ===========
Net income per share $ .026 $ .026 $ .008
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements
F-15
<PAGE>
VIDEO LEARNING SYSTEMS, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Retained
Number of Common Contributed Earnings Shareholders'
Shares Stock Capital (Deficit) Equity
----------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance at
January 1, 1997 1,063,750 $ 706,434 $ 18,000 $ (243,640) $ 480,794
Net income -- -- -- 27,848 27,848
----------- ----------- ----------- ----------- -----------
Balance at
December 31, 1997 1,063,750 706,434 18,000 (215,792) 508,642
Net income -- -- -- 27,373 27,373
----------- ----------- ----------- ----------- -----------
Balance at
December 31, 1998 1,063,750 $ 706,434 $ 18,000 $ (188,419) $ 536,015
=========== =========== =========== =========== ===========
Net income -- -- -- 8,866 8,866
----------- ----------- ----------- ----------- -----------
Balance at
June 30, 1999 (unaudited) 1,063,750 $ 706,434 $ 18,000 $ (179,553) $ 544,881
=========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to financial statements
F-16
<PAGE>
VIDEO LEARNING SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the
Six Months
Ended
June 30,
1997 1998 1999
----------- ----------- -----------
(unaudited)
<S> <C> <C> <C>
Cash flows from operating activities:
Net Income $ 27,848 $ 27,373 $ 8,866
Adjustments to reconcile net income to net
cash provided by operating activities:
Net change in:
Interest receivable 838 -- (153)
Refundable income taxes -- (4,458) --
Accounts payable -- -- 3,000
Accounts payable - related party 58,149 -- (58,149)
----------- ----------- -----------
Net cash from operating activities: 86,835 22,915 (46,436)
----------- ----------- -----------
Cash flows from investing activities:
Loans made (244,320) -- --
Collection of loans 137,000 44,301 23,337
----------- ----------- -----------
Net cash from investing activities (107,320) 44,301 23,337
----------- ----------- -----------
Net increase (decrease) in cash (20,485) 67,216 (23,099)
Cash at beginning of year 343,191 322,706 389,922
----------- ----------- -----------
Cash at end of year $ 322,706 $ 389,922 $ 366,823
=========== =========== ===========
Supplemental cash flow information
Interest paid $ -- $ -- $ --
Income taxes paid $ -- $ 4,408 $ --
</TABLE>
See accompanying notes to financial statements
F-17
<PAGE>
VIDEO LEARNING SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
Organization and Operations
Video Learning Systems, Inc. ("the Company") was incorporated under the
laws of the State of Minnesota on December 7, 1982. The Company is currently
evaluating various business opportunities. Previously, the Company was engaged
in the marketing of video tapes to the home video market.
Summary of Significant Accounting Policies
Basis of Accounting
The Company uses the accrual method of accounting for
financial reporting purposes.
Use of Estimates in Preparation of Financial Statements
The preparation of the accompanying financial statements in
conformity with generally accepted accounting principles requires
management to make certain estimates and assumptions that directly
affect the results of reported assets, liabilities, revenue, and
expenses. Actual results may differ from these estimates.
Cash and Cash Equivalents
For the purpose of the statement of cash flows the Company
considers all highly liquid debt instruments purchased with a maturity
of three months or less to be cash equivalents.
Video Production Costs
On December 31, 1994, the Company amortized the balance of
video production costs since no revenues had been generated over the
last four years. Video production costs are stated at the lower of
cost, amortized cost or estimated realizable value determined on the
individual - film - forecast computation method. The carrying value of
each video was compared on a periodic basis to its estimated future
revenue and, if appropriate, was adjusted to its net realizable value.
Summary of Significant Accounting Policies
Property and Equipment
Property and equipment are stated at cost. Depreciation is
provided by accelerated methods for both financial reporting and tax
purposes.
Net Income Per Share
Net income per share computations are based on the weighted
average number of common shares outstanding during the year including
common stock equivalents, if dilutive.
F-18
<PAGE>
VIDEO LEARNING SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
(continued)
Interim Financial Data (Unaudited)
The financial information presented for the six month period
ended June 30, 1999, including related information set forth in the
notes to financial statements, is unaudited. In the opinion of
management, this financial information reflects the adjustments
necessary for a fair presentation of the financial information for such
period. These adjustments consist of normal, recurring items. The
results of operations for the six month period ended June 30, 1999
should not necessarily be taken as indicative of the results of
operations that may be expected for the entire year.
Interim financial information for the six month period ended
June 30, 1998 is not included in these financial statements. The
Company did not prepare interim financial statements in 1998, and it is
not currently practicable to produce such interim financial statements
without undue expense. The Company does not believe such information is
material to an understanding of its current financial condition.
Concentrations of Credit Risk
The Company's financial instruments that are exposed to concentrations of credit
risk consist primarily of cash and money market funds. The Company maintains its
cash and money market funds at two brokerage institutions in Minneapolis,
Minnesota. Cash accounts are insured by SIPC up to $100,000 and overall each
brokerage institution insures accounts up to $25,000,000. Brokerage institutions
do not protect accounts from market loss.
Note Receivable
In January and February 1997, the Company received notes receivable -
related party totaling $245,000. These notes were paid-off by the assignment of
another note receivable from an outstate Corporation in June, 1997. The note
will be repaid in monthly installments of $5,000 and at an annual interest rate
of 7%. The President of the Company has personally guaranteed the note
receivable. The unpaid principal on the note was $200,019 and $244,320 at
December 31, 1998 and 1997, respectively.
Accounts Payable - Related Party
Accounts payable - related party was $58,149 at both December 31, 1998
and 1997 and was paid-off in full on March 5, 1999.
Income Taxes
Income tax expense was $0 for 1998 and $0 for 1997.
The Company is in a net operating loss carryforward position as of
December 31, 1998. Consequently a reconciliation of the statutory and state
income tax rates to the actual rates is not applicable.
F-19
<PAGE>
VIDEO LEARNING SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
(continued)
The Company has a net operating loss carryforward at December 31, 1998
as follows:
Expiration Date Federal State
--------------- ------- -----
2009 $ 17,000 $ 97,000
--------- ---------
$ 17,000 $ 97,000
========= =========
During the period of inception to May 1986, the Company was an S
Corporation whereby each shareholder reported its distributive share of the S
Corporation loss or income on its income tax return. As a result of the change
in status to a C Corporation, certain tax deductions are available to the
Company. These net "prepaid" taxes have been treated as contributed capital.
Prepaid and deferred income taxes result from timing differences in the
recognition of items of income and expenses for tax and for financial statement
purposes.
The Company has implemented the provisions of Statement of Financial
Standards No. 109, "Accounting for Income Taxes," which was issued by the
Financial Accounting Standards Board in 1992. A deferred tax asset and valuation
allowance have been recognized relating to the future benefit of the net
operating loss carryforward as follows:
1998 1997
---------- ----------
Current deferred tax asset $ 18,904 $ 25,800
Tax benefit of net operating loss (6,789) (6,896)
---------- ----------
Current deferred tax asset 12,115 18,904
Less: Valuation allowance (12,115) (18,904)
---------- ----------
$ -- $ --
========== ==========
F-20
<PAGE>
VIDEO LEARNING SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
(continued)
Commitments and Contingent Liabilities
During 1986, the Company acquired all assets and assumed all
liabilities of the dissolved E & E joint venture. The Company has agreed to pay
the previous joint venture partner a royalty of 40% of funds collected from
future sales of the Preschool Express videos and 50% of any amounts obtained in
the eventual sale of the master tapes produced by the joint venture.
During 1988, the Company acquired all assets and assumed all
liabilities of the dissolved Karate Martial Arts joint venture. The Company has
agreed to pay the previous joint venture partner a royalty based on one-sixth of
the royalties collected on the Karate Master video.
No royalty expenses were incurred under these agreements for the years
ending December 31, 1998 and 1997.
Distribution Agreement
In January 1992, Video Learning Systems, Inc. signed a letter of
agreement with another company to turn the Becoming Beautiful, Preschool
Express, Stanford Health and Kathy Smith videos over to them for distribution.
This company will place these videos with distributors, honoring the Video
Learning Systems, Inc. Video School House Agreement and absorb all costs
involved. This company will also pay Video Learning Systems, Inc. 35% of gross
royalties and revenues generated.
No revenues were generated under this agreement for the years ending
December 31, 1998 and 1997.
Reclassifications
Certain accounts in the prior-year financial statements have been
reclassified for comparative purposes to conform with the presentation in the
financial statements. These reclassifications had not net income effect.
Subsequent Event
On July 7, 1999, the assigned note receivable from an outside
Corporation was replaced by a demand note directly payable to the Company. The
terms of the note are similar to the assigned note receivable except that the
payments will increase from $5,000 per month to $10,000 per month starting
January 1, 2000.
F-21
<PAGE>
VIDEO LEARNING SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
(continued)
Restatement of 1997 Financial Information
During 1998 additional information was obtained that resulted in the
following restatements:
<TABLE>
<CAPTION>
Balance Sheet
------------------------------------------
Accounts
Payable Income Retained
Related Taxes Earnings
Party Payable (Deficit)
---------- ---------- ----------
<S> <C> <C> <C>
As previously stated at
December 31, 1997 $ -- $ 2,500 $ (160,143)
Restatement adjustment 58,149 (2,500) (55,649)
---------- ---------- ----------
Restated balance at December 31, 1997 $ 58,149 $ -- $ (215,792)
========== ========== ==========
<CAPTION>
Statement of Income
--------------------------
Interest Income tax
Income Expense
---------- ----------
As previously stated at
December 31, 1997 $ 85,983 $ 2,500
Restatement adjustment (58,149) (2,500)
---------- ----------
Restated balance at
December 31, 1997 $ 27,834 $ --
========== ==========
</TABLE>
F-22
<PAGE>
APPENDIX A
EXECUTION COPY
AGREEMENT AND PLAN OF MERGER
BETWEEN
CARDIA, INC.
AND
VIDEO LEARNING SYSTEMS, INC.
Dated as of July 1, 1999
<PAGE>
TABLE OF CONTENTS
PAGE
----
ARTICLE 1 THE MERGER; CONVERSION OF SHARES.................................A-1
1.1 The Merger.......................................................A-1
1.2 Effective Time...................................................A-1
1.3 Conversion of Shares.............................................A-1
1.4 Dissenters' Rights...............................................A-2
1.5 Exchange of VLS Common Stock.....................................A-2
1.6 Articles of Incorporation of the Surviving Corporation...........A-3
1.7 Bylaws of the Surviving Corporation..............................A-3
1.8 Directors and Officers of the Surviving Corporation..............A-3
ARTICLE 2 CLOSING..........................................................A-3
2.1 Time and Place...................................................A-3
2.2 Filings at the Closing...........................................A-4
ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF VLS............................A-4
3.1 Organization.....................................................A-4
3.2 Authorization....................................................A-4
3.3 Capitalization...................................................A-4
3.4 Financial Statements.............................................A-5
3.5 Absence of Undisclosed Liabilities...............................A-5
3.6 Consents and Approvals...........................................A-5
3.7 Compliance with Laws.............................................A-5
3.8 Litigation.......................................................A-5
3.9 Promissory Note..................................................A-5
3.10 Taxes............................................................A-5
3.11 Minute Books.....................................................A-6
3.12 No Finders.......................................................A-6
3.13 Proxy Statement..................................................A-6
3.14 Material Omissions...............................................A-6
ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF CARDIA.........................A-6
4.1 Organization.....................................................A-6
4.2 Authorization....................................................A-7
4.3 Capitalization...................................................A-7
4.4 Consents and Approvals...........................................A-7
4.5 Reports and Financial Statements.................................A-7
4.6 Registration Statement...........................................A-8
4.7 No Finders.......................................................A-8
4.8 Litigation.......................................................A-8
4.9 Taxes............................................................A-8
4.10 Material Omissions...............................................A-9
ARTICLE 5 COVENANTS........................................................A-9
<PAGE>
5.1 Conduct of Business of VLS.......................................A-9
5.2 Conduct of Business of Cardia....................................A-9
5.3 No Solicitation..................................................A-9
5.4 Access and Information..........................................A-10
5.5 Approval of Stockholders; Proxy Statement; Registration
Statement.......................................................A-10
5.6 Consents........................................................A-12
5.7 Expenses........................................................A-12
5.8 Further Actions.................................................A-12
5.9 Certain Notifications...........................................A-12
5.10 OTC Trading.....................................................A-12
ARTICLE 6 CLOSING CONDITIONS..............................................A-12
6.1 Conditions to Obligations of Cardia and VLS.....................A-12
6.2 Conditions to Obligations of Cardia.............................A-13
6.3 Conditions to Obligations of VLS................................A-13
ARTICLE 7 TERMINATION AND ABANDONMENT.....................................A-14
7.1 Termination.....................................................A-14
ARTICLE 8 MISCELLANEOUS...................................................A-15
8.1 Amendment and Modification......................................A-15
8.2 Waiver of Compliance; Consents..................................A-15
8.3 Investigation; Survival of Representations and Warranties.......A-15
8.4 Notices.........................................................A-15
8.5 Assignment......................................................A-16
8.6 Governing Law...................................................A-16
8.7 Counterparts....................................................A-17
8.8 Knowledge.......................................................A-17
8.9 Interpretation..................................................A-17
8.10 Publicity.......................................................A-17
8.11 Entire Agreement................................................A-17
8.12 Severability....................................................A-17
8.13 Specific Performance............................................A-18
<PAGE>
EXHIBITS:
Exhibit A: Duckson & Carlson LLC Opinion Matters [Not Provided].
Exhibit B: Lindquist & Vennum PLLP Opinion Matters [Not Provided].
<PAGE>
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT (the "Agreement") is dated as of July 1, 1999, by and
between Cardia, Inc., a Minnesota corporation ("Cardia") and Video Learning
Systems, Inc., a Minnesota corporation ("VLS").
WHEREAS, the respective Boards of Directors of Cardia and VLS have each
approved the merger of VLS with and into Cardia (the "Merger") upon the terms
and subject to the conditions set forth herein; and
WHEREAS, the parties desire to make certain representations,
warranties, and agreements in connection with the Merger and also to prescribe
various conditions to the Merger;
NOW, THEREFORE, in consideration of the foregoing premises and the
mutual representations, warranties, covenants, and agreements contained herein,
the parties agree as follows:
ARTICLE 1
THE MERGER; CONVERSION OF SHARES
1.1 THE MERGER. Subject to the terms and conditions of this Agreement,
at the Effective Time (as defined in Section 1.2), VLS shall be merged with and
into Cardia in accordance with the provisions of the Minnesota Business
Corporation Act (the "MBCA"), whereupon the separate corporate existence of VLS
shall cease. Cardia shall continue as the surviving corporation (the "Surviving
Corporation") in the Merger. From and after the Effective Time, the Surviving
Corporation shall possess all the rights, privileges, immunities, powers, and
franchises and be subject to all the restrictions, disabilities, and duties of
VLS and Cardia, all as more fully described in the MBCA.
1.2 EFFECTIVE TIME. As soon as practicable after each of the conditions
set forth in Article 6 have been satisfied or waived on the Closing Date (as
defined in Section 2.1), Cardia will file, or cause to be filed, with the
Secretary of State of the State of Minnesota Articles of Merger for the Merger,
which Articles shall be in the form required by and executed in accordance with
the applicable provisions of the MBCA. The Merger shall become effective at the
time such filing is made or, if agreed to by Cardia and VLS, such later time or
date set forth in the Articles of Merger (the "Effective Time").
1.3 CONVERSION OF SHARES. At the Effective Time, by virtue of the
Merger and without any action on the part of Cardia or VLS, or any holder of any
share of capital stock:
(a) The holders of shares of common stock of VLS, $.01 par value per
share ("VLS Common Stock"), will receive an aggregate of 200,000 shares of the
common stock of Cardia ("Cardia Common Stock"), $.01 par value per share (the
"Merger Consideration"). Each share of VLS Common Stock outstanding immediately
prior to the Effective Time will represent only the right to receive a fraction
of a share of Cardia Common Stock equal to the Merger Consideration divided by
the total number of shares of VLS Common Stock outstanding immediately prior to
the Effective Time (the "Per Share Merger Consideration").
(b) Each share of any other class of capital stock of VLS (other than
VLS Common Stock) or right to receive any class of capital stock of VLS shall be
canceled without payment of any consideration therefor and without any
conversion thereof.
(c) Each share of common stock of Cardia, par value $.01 per share,
issued and outstanding immediately prior to the Effective Time shall remain
outstanding and shall not be converted into any other security.
A-1
<PAGE>
1.4 DISSENTERS' RIGHTS. The parties acknowledge that, pursuant to
Section 302A.471 of the MBCA, the holders of VLS Common Stock shall have
dissenters' rights in connection with the Merger.
1.5 EXCHANGE OF VLS COMMON STOCK.
(a) At or prior to the Effective Time, Cardia shall cause Cardia's
stock transfer agent, or such other agent as is mutually agreed to by the
parties, to act as exchange agent (the "Exchange Agent") hereunder. As promptly
as practicable after the Effective Time, Cardia shall cause the Exchange Agent
to mail to each holder of record of a certificate or certificates that
immediately prior to the Effective Time represented outstanding shares of VLS
Common Stock ("VLS Certificates") a form letter of transmittal (which shall
specify that delivery shall be effective, and risk of loss and title to the VLS
Certificate(s) shall pass, only upon delivery of the VLS Certificate(s) to the
Exchange Agent) and instructions for such holder's use in effecting the
surrender of the VLS Certificates in exchange for certificates representing
shares of Cardia Common Stock and cash in lieu of any fractional shares.
(b) As soon as practicable after the Effective Time, the Exchange Agent
shall distribute to holders of shares of VLS Common Stock, upon surrender to the
Exchange Agent of one or more VLS Certificates for cancellation, together with a
duly-executed letter of transmittal, (i) one or more certificates representing
the number of whole shares of Cardia Common Stock into which the shares
represented by the VLS Certificate(s) shall have been converted pursuant to
Section 1.3(a), (ii) a bank check in the amount of cash into which the shares
represented by the VLS Certificate(s) shall have been converted pursuant to
Section 1.5(f) (relating to fractional shares), and (iii) any dividends or other
distributions to which such holder is entitled pursuant to Section 1.5(c). The
VLS Certificate(s) so surrendered shall be canceled. In the event of a transfer
of ownership of VLS Common Stock that is not registered in the transfer records
of VLS, it shall be a condition to the issuance of shares of Cardia Common Stock
that the VLS Certificate(s) so surrendered shall be properly endorsed or be
otherwise in proper form for transfer and that such transferee shall (i) pay to
the Exchange Agent any transfer or other taxes required or (ii) establish to the
satisfaction of the Exchange Agent that such tax has been paid or is not
payable.
(c) Holders of VLS Common Stock will be entitled to any dividends or
other distributions pertaining to the Cardia Common Stock received in exchange
therefor that become payable to persons who are holders of record of Cardia
Common Stock as of a record date that follows the Effective Time, but only after
they have surrendered their VLS Certificates for exchange. Subject to the
effect, if any, of applicable law, the Exchange Agent shall receive, hold, and
remit any such dividends or other distributions to each such record holder
entitled thereto, without interest, at the time that such VLS Certificates are
surrendered to the Exchange Agent for exchange. Holders of VLS Common Stock will
not be entitled, however, to dividends or other distributions that become
payable before or after the Effective Time to persons who were holders of record
of Cardia Common Stock as of a record date that is prior to the Effective Time.
(d) All certificates evidencing shares of Cardia Common Stock that are
issued upon the surrender for exchange of VLS Certificates, together with any
cash paid for fractional shares pursuant to Section 1.5(f) hereof, shall be
deemed to have been issued in full satisfaction of all rights pertaining to the
shares of VLS Common Stock represented by the surrendered VLS Certificates.
(e) After the Effective Time, there shall be no further registration of
transfers on the stock transfer books of the Surviving Corporation of the shares
of VLS Common Stock that were outstanding immediately prior to the Effective
Time. If, after the Effective Time, VLS Certificates representing such shares
are presented to the Surviving Corporation, they shall be canceled and exchanged
as provided in this Article 1. As of the Effective Time, the holders of VLS
Certificates representing shares of VLS Common Stock shall cease to have any
rights as stockholders of VLS, except such rights, if any, as they may have
pursuant to the MBCA or this Agreement. Except as provided above, until such VLS
Certificates are surrendered for exchange, each such VLS Certificate shall,
after the Effective Time, represent for all purposes only the right to receive a
certificate or certificates evidencing the number of whole shares of Cardia
Common Stock into which the shares of VLS Common Stock are convertible
A-2
<PAGE>
pursuant to the Merger as provided in Section 1.3(a) hereof, the right to
receive the cash value of any fraction of a share of Cardia Common Stock as
provided in Section 1.5(f) hereof and the right to receive any dividends or
distributions as provided in Section 1.5(c).
(f) No fractional shares of Cardia Common Stock and no certificates or
scrip therefor, or other evidence of ownership thereof, shall be issued in
connection with the Merger. No dividend or other distribution of Cardia shall
relate to any fractional share, and such fractional share interests shall not
entitle the owner thereof to vote or to any rights of a shareholder of Cardia.
All fractional shares of Cardia Common Stock to which a holder of VLS Common
Stock immediately prior to the Effective Time would otherwise be entitled, at
the Effective Time, shall be aggregated if and to the extent multiple VLS
Certificates of such holder are submitted together to the Exchange Agent. If a
fractional share results from such aggregation, then (in lieu of such fractional
share) the Exchange Agent shall pay to each holder of shares of VLS Common Stock
who otherwise would be entitled to receive such fractional share of Cardia
Common Stock an amount of cash (without interest) determined by multiplying
$1.00 by the fractional share of Cardia Common Stock to which such holder would
otherwise be entitled. Cardia will make available to the Exchange Agent any cash
necessary for this purpose.
(g) In the event any VLS Certificates shall have been lost, stolen, or
destroyed, the Exchange Agent shall issue in respect of such lost, stolen, or
destroyed VLS Certificates, upon the making of an affidavit of that fact by the
holder thereof, such shares of Cardia Common Stock, cash for fractional shares,
if any, and dividends or other distributions, if any, as may be required
pursuant to this Article 1; provided, however, that Cardia may, in its
discretion and as a condition precedent to the issuance thereof, require the
owner of such lost, stolen, or destroyed VLS Certificate to deliver a bond in
such sum as Cardia may reasonably direct as indemnity against any claim that may
be made against Cardia or the Exchange Agent with respect to such VLS
Certificate alleged to have been lost, stolen, or destroyed.
1.6 ARTICLES OF INCORPORATION OF THE SURVIVING CORPORATION. The
Articles of Incorporation of Cardia, as in effect immediately prior to the
Effective Time, shall be the Articles of Incorporation of the Surviving
Corporation until thereafter amended in accordance with applicable law.
1.7 BYLAWS OF THE SURVIVING CORPORATION. The Bylaws of Cardia, as in
effect immediately prior to the Effective Time, shall be the Bylaws of the
Surviving Corporation until thereafter amended in accordance with applicable
law.
1.8 DIRECTORS AND OFFICERS OF THE SURVIVING CORPORATION. The directors
and officers of Cardia immediately prior to the Effective Time shall be the
directors and officers, respectively, of the Surviving Corporation until their
respective successors shall be duly elected and qualified.
ARTICLE 2
CLOSING
2.1 TIME AND PLACE. Subject to the satisfaction or waiver of the
provisions of Article 6, the closing of the Merger (the "Closing") shall take
place at 1:00 p.m., local time, on the day after the Required VLS Stockholder
Vote (as defined in Section 3.2) is obtained, or as soon thereafter as, and in
any event no later than the second business day after, all conditions to Closing
have been satisfied or waived, or on such other date and/or at such other time
as Cardia and VLS may mutually agree. The date on which the Closing actually
occurs is herein referred to as the "Closing Date." The Closing shall take place
at the offices of Lindquist & Vennum P.L.L.P. in Minneapolis, or at such other
place or in such other manner (e.g., by facsimile exchange of signature pages
with originals to promptly follow by overnight delivery) as the parties hereto
may agree.
A-3
<PAGE>
2.2 FILINGS AT THE CLOSING. At the Closing, subject to the provisions
of Article 6, Cardia and VLS shall cause the Articles of Merger to be filed in
accordance with the provisions of Section 302A.615 of the MBCA, and take any and
all other lawful actions and do any and all other lawful things necessary to
cause the Merger to become effective.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF VLS
VLS hereby makes the following representations and warranties to
Cardia:
3.1 ORGANIZATION. VLS is an entity duly organized, validly existing,
and in good standing under the laws of the state of Minnesota and has all
requisite corporate power and authority to own, lease, and operate its
properties and to carry on its business as now being conducted. VLS is duly
qualified and in good standing to do business in each jurisdiction in which the
property owned, leased, or operated by it or the nature of the business
conducted by it makes such qualification necessary, except where the failure to
be so qualified or in good standing would not have a VLS Material Adverse
Effect. "VLS Material Adverse Effect" means an effect that is or is reasonably
expected to be materially adverse: (i) to the business, results of operation, or
financial condition of VLS or (ii) to VLS' ability to perform any of its
material obligations under this Agreement or to consummate the Merger. VLS has
heretofore delivered or made available to Cardia or its advisers complete and
accurate copies of the Articles of Incorporation and Bylaws of VLS, as currently
in effect. As of the date hereof, VLS does not, directly or indirectly, own or
control or have any material equity, partnership, or other similar ownership
interest in any corporation, partnership, joint venture, or other business
association or entity.
3.2 AUTHORIZATION. VLS has all necessary corporate power and authority
to execute and deliver this Agreement and, subject to obtaining the necessary
approval of its stockholders, to consummate the transactions contemplated
hereby. The execution and delivery by VLS of this Agreement and the consummation
by VLS of the transactions contemplated hereby, have been duly and validly
authorized and approved by VLS' Board of Directors. No other corporate
proceedings on the part of VLS, other than a meeting of VLS' stockholders (the
"VLS Stockholders' Meeting"), are necessary to authorize this Agreement, and,
subject to obtaining the approval and adoption of this Agreement and approval of
the Merger by a majority of the shares of VLS Common Stock outstanding as of the
record date of VLS Stockholders' Meeting (the "Required VLS Stockholder Vote"),
no other corporate action on the part of VLS is necessary to consummate the
transactions contemplated hereby. The Merger has been declared advisable by the
Board of Directors of VLS. This Agreement has been duly and validly executed and
delivered by VLS and, assuming due execution and delivery by the other parties
hereto, constitutes the valid and binding obligation of VLS, enforceable against
VLS in accordance with its terms, subject to bankruptcy, insolvency and similar
laws, and rules of law governing specific performance, injunctive relief, or
other equitable remedies.
3.3 CAPITALIZATION. As of the close of business on June 30, 1999, the
authorized capital stock of VLS consisted of 10,000,000 shares of VLS Common
Stock, no par value per share, of which 1,063,750 were issued and outstanding.
All issued and outstanding shares of VLS Common Stock have been validly issued,
are fully paid and nonassessable, and have not been issued in violation of and
are not currently subject to any preemptive rights. As of the close of business
on June 30, 1999, there were no outstanding or authorized subscriptions,
options, warrants, calls, rights, convertible securities, commitments,
restrictions, arrangements, or any other agreements of any character to which
VLS was a party that, directly or indirectly, (a) obligated VLS to issue any
shares of capital stock or any securities convertible into, or exercisable or
exchangeable for, or evidencing the right to subscribe for, any shares of
capital stock, (b) called for or related to the sale, pledge, transfer, or other
disposition or encumbrance by VLS of any shares of its capital stock, or (c)
related to the voting or control of such capital stock.
A-4
<PAGE>
3.4 FINANCIAL STATEMENTS. The audited balance sheets for the years
ended December 31, 1996, 1997 and 1998 and the related income statements and
statements of cash flows of VLS for the periods then ended (the "Financial
Statements") have been furnished to Cardia and fully and fairly represent the
financial condition and results of operations as of the dates and for the
periods covered by the Financial Statements.
3.5 ABSENCE OF UNDISCLOSED LIABILITIES. Neither VLS nor any Subsidiary
has any liabilities or obligations of any nature (whether absolute, accrued,
contingent or otherwise) of the type required to be reflected on or reserved
against in, or disclosed in the notes to, a balance sheet prepared in accordance
with generally accepted accounting principles except liabilities or obligations
that will be accrued or reserved against in the audited balance sheet of VLS as
of December 31, 1998 or referred to in the notes thereto.
3.6 CONSENTS AND APPROVALS. The execution and delivery by VLS of this
Agreement and the consummation by VLS of the transactions contemplated hereby
will not: (a) violate any provision of the Articles of Incorporation or Bylaws
of VLS; (b) violate in any material way any material statute, rule, regulation,
order, or decree of any federal, state, local, or foreign governmental or
regulatory body or authority (each a "Governmental Body") or any nongovernmental
self-regulatory agency by which VLS or any of its properties or assets may be
bound; (c) require any filing by VLS of any permit, consent, authorization or
approval from any Governmental Body or any nongovernmental self-regulatory
agency; or (d) result in any violation or breach of, or constitute a default
under, result in the loss of any material benefit under, or give rise to any
right of termination, cancellation, increased payments, or acceleration under,
or result in the creation of any lien, attachment, encumbrance or other claim
("Lien") on any of the properties or assets of VLS under any of the terms,
conditions, or provisions of any material note, bond, mortgage, indenture,
license, franchise, permit, authorization, agreement, or other instrument or
obligation to which VLS is a party, or by which it or any of its properties or
assets may be bound.
3.7 COMPLIANCE WITH LAWS. VLS is not in default or violation in any
material respect of any applicable federal, state, local, or foreign laws,
ordinances, regulations, published interpretations, judgments, decrees,
injunctions, permits, licenses, certificates, governmental requirements, orders,
or other similar items of any court or other Governmental Body (and including
those of any nongovernmental self-regulatory agency and including environmental
laws or regulations), except for such defaults or violations that would not have
a VLS Material Adverse Effect.
3.8 LITIGATION. As of the date of this Agreement, there are no legal,
regulatory or other proceedings pending or threatened against VLS.
3.9 PROMISSORY NOTE. The promissory note dated June 20, 1997 in the
original principal amount of $268,770.02 executed by KR1, Inc. d/b/a Firstat
Nursing of Atlanta, and made payable to VLS (the "Note") has a current
outstanding principal balance of $200,019 as of December 31, 1998 and accrues
interest at a rate of seven percent (7%) per annum. The Note is personally
guaranteed by Kenneth J. Rickert, Jr. (the "Guaranty"). The Note and Guaranty
are owned by VLS and are not subject to any liens, claims, defenses,
counterclaims, encumbrances or set-offs. KR1, Inc. is not currently in default
with respect to any of its obligations under the Note.
3.10 TAXES. (i) VLS has filed all state, local, United States, foreign,
or other tax reports and returns required to be filed by any of them, (ii) VLS
has duly paid, or accrued on their books of account, all taxes (including
estimated taxes) shown as due on such reports and returns (or such extension
requests), or assessed against them, other than taxes being contested in good
faith in proper proceedings, and (iii) the liabilities and reserves for taxes
reflected on VLS 1998 audited balance sheet will be adequate to cover all taxes
payable by VLS for all taxable periods and portions thereof ending on or before
the dates thereof. No tax audits are pending against and no claims for taxes
have been received in writing by VLS. VLS has not, with regard to any assets or
property held, acquired or to be acquired, filed a consent to the application of
Section 341(f)(2) of the Code.
For the purposes of this Agreement, "tax" shall mean and include taxes,
duties, withholdings, assessments,
A-5
<PAGE>
and charges assessed or imposed by any governmental authority (together with any
interest, penalties and additions to tax imposed with respect thereto),
including but not limited to all federal, state, county, local, and foreign
income, profits, gross receipts, import, ad valorem, real and personal property,
franchise, license, sales, use, value added, stamp, transfer, withholding,
payroll, employment, excise, custom, duty, and any other taxes, obligations and
assessments of any kind whatsoever; "tax" shall also include any liability for
taxes arising as a result of being (or ceasing to be) a member of any
affiliated, consolidated, combined, or unitary group as well as any liability
for taxes under any tax allocation, tax sharing, tax indemnity, or similar
agreement.
3.11 MINUTE BOOKS. VLS has previously made available to Cardia or its
representatives all of its minutes of meetings of and corporate actions or
written consents by the stockholders, Board of Directors, and committees of the
Board of Directors of VLS since January 1, 1996.
3.12 NO FINDERS. No act of VLS has given or will give rise to any claim
against any of the parties hereto for a brokerage commission, finder's fee, or
other like payment in connection with the transactions contemplated herein.
3.13 PROXY STATEMENT. The Proxy Statement/Prospectus (as defined in
Section 5.5 hereof) and any amendments or supplements thereto will comply as to
form in all material respects with all applicable laws, and none of the
information supplied by VLS specifically for inclusion or incorporation therein
or in any amendments or supplements thereto, or in any schedules required to be
filed with the SEC in connection therewith, will, at the date the Proxy
Statement/Prospectus (or any amendment or supplement thereto) is first mailed to
stockholders, or at the time of the VLS Stockholders' Meeting, contain any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary in order to make the statements therein, in
light of the circumstances under which they were made, not misleading; provided,
however, that no representation or warranty is made by VLS with respect to
information supplied by Cardia specifically for inclusion in the Proxy
Statement/Prospectus.
3.14 MATERIAL OMISSIONS. No representation or warranty by VLS in this
Agreement, nor any statement, certificate or schedule furnished to or to be
furnished by VLS pursuant to this Agreement contains or will contain any untrue
statement of material fact or omits or will omit a material fact necessary to
make the statements contained herein or therein not misleading in light of the
circumstances.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF CARDIA
Cardia hereby makes the following representations and warranties to
VLS:
4.1 ORGANIZATION. Cardia is a corporation duly organized, validly
existing, and in good standing under the laws of the State of Minnesota. Cardia
has all requisite corporate power and authority to own, lease, and operate its
properties and to carry on its business as now being conducted, except where the
failure to be so organized, existing or in good standing or to have such
corporate power and authority would not, individually or in the aggregate, have
a Cardia Material Adverse Effect (as defined below). Cardia is duly qualified
and in good standing to do business in each jurisdiction in which the property
owned, leased, or operated by it or the nature of the business conducted by it
makes such qualification necessary, except where the failure to be so qualified
or in good standing would not have a Cardia Material Adverse Effect. "Cardia
Material Adverse Effect" means an effect that is or is reasonably expected to
be, materially adverse (i) to the business, results of operation, or financial
condition of Cardia, (ii) to Cardia's ability to conduct such business, as
presently conducted, following the Effective Time, or (iii) to Cardia's ability
to perform any of its material obligations under this Agreement or to consummate
the Merger. Cardia has heretofore delivered or made available to VLS or its
advisers complete and accurate copies of the Articles of Incorporation and
Bylaws of Cardia, as currently in effect. As of the date hereof, Cardia does
not,
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directly or indirectly, own or control or have any material equity, partnership,
or other similar ownership interest in any corporation, partnership, joint
venture, or other business association or entity that is material to Cardia.
4.2 AUTHORIZATION. Cardia has all necessary corporate power and
authority to execute and deliver this Agreement and to consummate the
transactions contemplated hereby. The execution and delivery by Cardia of this
Agreement and the other agreements contemplated hereby to which Cardia is a
party, and the consummation by Cardia of the transactions contemplated hereby
and thereby, have been duly and validly authorized and approved by the Board of
Directors of Cardia, and no other corporate proceedings on the part of Cardia,
and no vote, consent or approval of Cardia's shareholders, are necessary to
authorize this Agreement or to consummate the transactions contemplated hereby.
This Agreement has been duly and validly executed and delivered by Cardia and,
assuming due execution and delivery by VLS, constitutes the valid and binding
obligation of Cardia, enforceable against it 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.
4.3 CAPITALIZATION. As of June 30, 1999, the authorized capital stock
of Cardia consisted of 10,000,000 shares of Common Stock with a par value of
$.01 per share, of which there were 1,000,081 shares issued and outstanding and
1,000,000 shares of Preferred Stock with a par value of $.01 per share, of which
there were no shares issued and outstanding. All issued and outstanding shares
of Cardia Common Stock are, and the shares of Cardia Common Stock to be issued
and delivered in the Merger pursuant to Article 1 hereof shall be, at the time
of issuance and delivery, validly issued, fully paid, nonassessable, and free of
preemptive rights. The shares of Cardia Common Stock to be issued and delivered
in the Merger pursuant to Article 1 hereof shall be registered under the 1933
Act. As of the close of business on June 30, 1999, except for options to
purchase an aggregate total of 132,500 shares of Cardia Common Stock that were
granted pursuant to Cardia's 1999 Omnibus Stock Incentive Plan, there were not
any outstanding or authorized subscriptions, options, warrants, calls, rights,
convertible securities, commitments, restrictions, arrangements, or any other
agreements of any character to which Cardia was a party that, directly or
indirectly, (a) obligated Cardia to issue any shares of capital stock or any
securities convertible into, or exercisable or exchangeable for, or evidencing
the right to subscribe for, any shares of capital stock, (b) called for or
related to the sale, pledge, transfer, or other disposition or encumbrance by
Cardia of any shares of its capital stock, or (c) related to the voting or
control of such capital stock.
4.4 CONSENTS AND APPROVALS. The consummation of the transactions
contemplated hereby and thereby will not: (a) violate any provision of the
Articles of Incorporation or Bylaws of Cardia; (b) violate in any material way
any material statute, rule, regulation, order, or decree of any Governmental
Body or any nongovernmental self-regulatory agency by which Cardia or any of its
properties or assets may be bound; (c) require any filing by Cardia of any
permit, consent, authorization or approval from any Governmental Body or any
nongovernmental self-regulatory agency; or (d) result in any violation or breach
of, or constitute (with or without due notice or lapse of time or both) a
default under, result in the loss of any material benefit under, or give rise to
any right of termination, cancellation, increased payments, or acceleration
under, or result in the creation of any Lien on any of the properties or assets
of Cardia under, any of the terms, conditions, or provisions of any material
note, bond, mortgage, indenture, license, franchise, permit, agreement, or other
instrument or obligation to which Cardia is a party, or by which it or any of
its properties or assets may be bound, except, in the case of clauses (b), (c)
and (d), for any such filings, permits, consents or approvals or violations,
breaches, defaults, or other occurrences that could not reasonably be expected
to prevent or delay consummation of any of the transaction contemplated hereby
in any material respect, or otherwise prevent Cardia from performing its
obligations under this Agreement in any material respect, and would not have a
Cardia Material Adverse Effect.
4.5 REPORTS AND FINANCIAL STATEMENTS. Cardia has filed all forms,
reports, registration statements, and other documents required to be filed by it
with the SEC since February 11, 1999 (such forms, reports, registration
statements and other documents, together with any amendments thereto, are
referred to as the "Cardia SEC Filings"). As of their respective dates, the
Cardia SEC Filings (i) complied as to form in all material
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respects with the applicable requirements of the 1933 Act and the 1934 Act, as
the case may be, and (ii) did not contain any untrue statement of a material
fact or omit to state a material fact required to be stated therein or necessary
to make the statements made therein, in light of the circumstances under which
they were made, not misleading. The audited financial statements included or
incorporated by reference in the Cardia SEC Filings, including but not limited
to Cardia's audited financial statements at and for the year ended December 31,
1998 (the "Cardia December 31, 1998 Financials"), and the unaudited interim
financial statements at and for periods commencing on or after January 1, 1999
included or incorporated by reference in the forms, reports, registration
statements and other documents filed by Cardia with the SEC (i) were prepared in
accordance with generally accepted accounting principles (except, in the case of
unaudited statements, as permitted by Form 10-QSB filed with the SEC) applied on
a consistent basis during the periods involved (except as may be indicated
therein or in the notes thereto) subject, in the case of unaudited interim
financial statements, to the absence of notes and to year-end adjustments, (ii)
complied as of their respective dates in all material respects with applicable
accounting requirements and the published rules and regulations of the SEC with
respect thereto, and (iii) fairly present in all material respects the
consolidated financial position of Cardia as of the dates thereof and the
income, cash flows, and changes in shareholders' equity of Cardia for the
periods involved, except as otherwise noted therein and subject, in the case of
unaudited statements, to normal year-end audit adjustments.
4.6 REGISTRATION STATEMENT. The Registration Statement (as defined in
Section 5.5 hereof) and any amendments or supplements thereto will comply as to
form in all material respects with the 1933 Act, and none of the information
supplied by Cardia specifically for inclusion or incorporation therein or in any
amendments or supplements thereto, or in any schedules required to be filed with
the SEC in connection therewith, will, at the time the Registration Statement
becomes effective, at the date the Proxy Statement/Prospectus (or any amendment
or supplement thereto) is first mailed to VLS' stockholders or at the time of
the VLS Stockholders' Meeting, or at the Effective Time, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading, provided, however,
that no representation or warranty is made by Cardia with respect to information
supplied by or on behalf of VLS or any affiliate of VLS specifically for
inclusion in the Registration Statement.
4.7 NO FINDERS. No act of Cardia has given or will give rise to any
claim against any of the parties hereto for a brokerage commission, finder's
fee, or other like payment in connection with the transactions contemplated
herein.
4.8 LITIGATION. As of the date of this Agreement, there are no legal,
regulatory or other proceedings pending or threatened against Cardia.
4.9 TAXES. Except for such matters that would not have a Cardia
Material Adverse Effect, (i) Cardia has filed, or has obtained extensions to
file (which extensions have not expired without filing), all state, local,
United States, foreign, or other tax reports and returns required to be filed by
it, (ii) Cardia has duly paid, or accrued on its books of account, all taxes
(including estimated taxes) shown as due on such reports and returns (or such
extension requests), or assessed against it, other than taxes being contested in
good faith in proper proceedings, and (iii) the liabilities and reserves for
taxes which are reflected on the Cardia Balance Sheets are adequate to cover all
taxes payable by Cardia for all taxable periods and portions thereof ending on
or before the dates thereof. To Cardia's knowledge, no tax audits are pending
against and no claims for taxes have been received in writing by Cardia, other
than audits and claims that would not have a Cardia Material Adverse Effect.
Cardia has not, with regard to any assets or property held, acquired or to be
acquired by it, filed a consent to the application of Section 341(f)(2) of the
Code.
4.10 MATERIAL OMISSIONS. No representation or warranty by Cardia in
this Agreement, nor any statement, certificate or schedule furnished to or to be
furnished by Cardia pursuant to this Agreement contains or
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will contain any untrue statement of material fact or omits or will omit a
material fact necessary to make the statements contained herein or therein not
misleading in light of the circumstances.
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ARTICLE 5
COVENANTS
5.1 CONDUCT OF BUSINESS OF VLS. Except as contemplated by this
Agreement, unless Cardia shall otherwise consent in writing (such consent not to
be unreasonably withheld or delayed), during the period from the date of this
Agreement to the Effective Time, VLS will (i) conduct its respective operations,
to the extent commercially reasonable, according to its ordinary and usual
course of business and consistent with past practice, and (ii) promptly advise
Cardia of any material change in its properties, liabilities or financial
condition.
5.2 CONDUCT OF BUSINESS OF CARDIA. Except as contemplated by this
Agreement, unless VLS shall otherwise consent in writing (such consent not to be
unreasonably withheld or delayed), during the period from the date of this
Agreement to the Effective Time, Cardia will (i) conduct its operations, to the
extent commercially reasonable, according to its ordinary and usual course of
business and consistent with past practice, and (ii) use commercially reasonable
efforts to preserve substantially intact its business organization, to keep
available the services of its officers and employees and to maintain
satisfactory relationships with licensors, licensees, suppliers, contractors,
distributors, consultants, customers, and others having material business
relationships with it.
5.3 NO SOLICITATION. VLS shall not, and shall cause its officers,
directors, employees, representatives, agents, or affiliates (including, but not
limited to any investment banker, attorney or accountant retained by VLS) not
to, directly or indirectly, solicit, knowingly encourage, initiate, or
participate in any way in discussions or negotiations with, or knowingly provide
any nonpublic information to, any corporation, partnership, person, or other
entity or group (other than Cardia or any affiliate or agent of Cardia)
concerning any proposed Alternative Transaction (as defined below), or otherwise
knowingly facilitate any effort or attempt to propose, make or implement an
Alternative Transaction. For purposes of this Agreement, "Alternative
Transaction" shall mean any of the following involving VLS: (i) any tender
offer, exchange offer, merger, consolidation, share exchange, business
combination or similar transaction; (ii) any transaction or series of related
transactions pursuant to which any person or entity (or its shareholders), other
than Cardia or any of its affiliates (a "Third Party") acquires shares (or
securities exercisable for or convertible into shares) representing more than
50% of the outstanding shares of any class of capital stock of VLS; or (iii) any
sale, lease, exchange, licensing, transfer or other disposition pursuant to
which a Third Party acquires control of more than 50% of the assets (including,
but not limited to, Intellectual Property assets) of VLS (determined by
reference to the fair market value of such assets), in a single transaction or
series of related transactions. VLS will immediately terminate all discussions
with Third Parties concerning any proposed Alternative Transaction, and will
request that such Third Parties promptly return any confidential information
furnished by VLS in connection with any proposed Alternative Transaction. VLS
will not waive any provision of any confidentiality, standstill or similar
agreement entered into with any third party regarding any proposed Alternative
Transaction, and prior to the Closing shall enforce all such agreements in
accordance with their terms. VLS will promptly communicate to Cardia the name of
the person or entity submitting, and the terms and conditions of, any proposal
or inquiry that it receives after the date hereof in respect of any proposed
Alternative Transaction or a reasonably detailed description of any such
information requested from it after the date hereof or of any such negotiations
or discussions being sought to be initiated or continued with VLS after the date
hereof in respect of a proposed Alternative Transaction.
The foregoing notwithstanding, this Agreement shall not prohibit the Board of
Directors of VLS from
(i) prior to the Required VLS Stockholder Vote, furnishing nonpublic
information to or entering into discussions or negotiations with, any person or
entity that makes an unsolicited Superior Proposal (as defined below), if, and
only to the extent that:
(a) the Board of Directors reasonably and in good faith determines that
failure to take such action would be inconsistent with the fiduciary duties of
the Board of Directors to its stockholders under applicable law;
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(b) prior to first furnishing nonpublic information to, or first
entering into any substantive discussions and negotiations with, such person or
entity after the date hereof, VLS (i) provides written notice to Cardia to the
effect that it intends to furnish information to, or enter into discussions or
negotiations with, a person or entity making a Superior Proposal, and naming and
identifying the person or entity making the Superior Proposal, and (ii) receives
from such person or entity an executed confidentiality agreement with terms no
less favorable to VLS than the Confidentiality Agreement (as defined below)
entered into with Cardia; and
(c) VLS provides Cardia with all non-public information to be provided
to such person or entity which Cardia has not previously received from VLS, and
VLS keeps Cardia informed, on a daily or more regular basis if the context
requires or Cardia so requests, of the status, terms and conditions and all
other material information with respect to any such discussions or negotiations;
and
(ii) to the extent applicable, complying with Rule 14e-2 or 14d-9
promulgated under the 1934 Act with regard to a proposed Alternative
Transaction.
Nothing in this Section shall (x) permit VLS to terminate this Agreement (except
as specifically provided in Article 7 hereof), or (y) permit VLS to enter into
any agreement providing for an Alternative Transaction (other than as
specifically provided in Article 7 hereof, or the confidentiality agreement as
provided, and in the circumstances and under the conditions set forth, above)
for as long as this Agreement remains in effect.
For purposes of this Agreement, a "Superior Proposal" shall mean a proposal for
an Alternative Transaction that the Board of Directors of VLS has reasonably and
in good faith determined (with the advice of its financial advisors and taking
into account all legal, financial and regulatory aspects of the likelihood of
the consummation of such Alternative Transaction, including, but not limited to,
the conditions to consummation and the consequences under such Alternative
Transaction proposal of any material adverse effects or changes in VLS) to be
more favorable to VLS' stockholders than the transactions contemplated by this
Agreement.
5.4 ACCESS AND INFORMATION. VLS and Cardia shall afford each other, and
to their respective accountants, officers, directors, employees, counsel, and
other representatives, reasonable access during normal business hours upon
reasonable prior notice, from the date hereof through the Effective Time, to all
of its properties, books, contracts, commitments, and records, and, during such
period, VLS and Cardia shall furnish promptly to each other all information
concerning its businesses, prospects, properties, liabilities, results of
operations, financial condition, research and development, intellectual
property, officers, employees, consultants, advisers, distributors, customers,
suppliers, and others having material dealings with it as the other may
reasonably request, and reasonable opportunity to contact and obtain information
from such officers, employees, consultants, advisers, distributors, customers,
suppliers, and others having dealings with it as the other may reasonably
request.
5.5 APPROVAL OF STOCKHOLDERS; PROXY STATEMENT; REGISTRATION STATEMENT.
(a) VLS shall use commercially reasonable efforts to promptly, subject
to applicable law or SEC regulations, take all action necessary in accordance
with the MBCA and VLS' Articles of Incorporation and Bylaws to cause a special
meeting of VLS' stockholders (the "VLS Stockholders Meeting") to be duly called
and held as soon as reasonably practicable following the date upon which the
Registration Statement (as defined below) becomes effective for the purpose of
voting upon the Merger and the adoption and approval of this Agreement and at
such Meeting to submit this Agreement and the Merger to a vote of the
stockholders. The stockholder vote or consent required for adoption and approval
of this Agreement and the approval of the Merger shall be no greater than that
set forth in the MBCA and VLS' Articles of Incorporation as previously provided
to Cardia. Accordingly, VLS represents and warrants that the affirmative vote of
the holders of record of a majority of the shares of VLS Common Stock
outstanding on the record date for VLS Stockholders Meeting is all that is
necessary to obtain stockholder adoption and approval of this Agreement and
approval of the Merger. VLS shall use commercially reasonable efforts to obtain
the adoption and approval by VLS' stockholders of this Agreement and the
approval by
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VLS' stockholders of the Merger, unless such action is inconsistent with the
fiduciary duties of the Board of Directors to its stockholders imposed by
applicable law. In accordance therewith, VLS and Cardia will prepare and file,
as soon as reasonably practicable, a proxy statement/ prospectus to be included
as part of the Registration Statement (such proxy statement/prospectus, together
with notice of meeting, form of proxy, and any letter or other materials to VLS'
stockholders included therein are referred to in this Agreement as the "Proxy
Statement/Prospectus"). Cardia shall furnish to VLS all information concerning
Cardia and its subsidiaries, officers, directors and shareholders, and shall
take such other action and otherwise cooperate, as VLS may reasonably request in
connection with any such action. VLS shall use commercially reasonable efforts
to cause the definitive Proxy Statement/Prospectus to be mailed to the
stockholders of VLS as soon as reasonably practicable after the Registration
Statement shall have become effective, with the date of mailing as mutually
determined by VLS and Cardia. The Proxy Statement/Prospectus shall include the
recommendation of VLS' Board of Directors in favor of the Merger, unless such
action is inconsistent with the fiduciary duties of the Board of Directors to
its stockholders imposed by applicable law. Unless and until this Agreement is
validly terminated pursuant to Article 7, nothing herein shall limit or
eliminate in any way VLS' obligation to call, give notice of, convene and hold
the VLS Stockholders Meeting and at such meeting submit this Agreement and the
Merger to a vote of VLS' stockholders (and not postpone or adjourn such meeting
or the vote by VLS' stockholders upon this Agreement and the Merger to another
date without Cardia's approval, not to be unreasonably withheld if and only to
the extent such postponement or adjournment is required by law or by SEC
regulation).
(b) Cardia shall, with the cooperation of VLS, prepare and file, as
soon as reasonably practicable following completion of the SEC's review and
comment on the Proxy Statement/Prospectus, a registration statement under the
1933 Act registering the shares of Cardia Common Stock to be issued in the
Merger (the "Registration Statement"), which Registration Statement shall
include the Proxy Statement/Prospectus. Cardia will use commercially reasonable
efforts to have the Registration Statement declared effective by the SEC as
promptly thereafter as practicable. Cardia shall also take any action required
to be taken under state blue sky or securities laws in connection with the
issuance of Cardia Common Stock pursuant to the Merger. VLS shall furnish to
Cardia all information concerning VLS and its Subsidiaries and the holders of
its capital stock, and shall take such other action and otherwise cooperate, as
Cardia may reasonably request in connection with any such action.
(c) Cardia shall notify VLS promptly (i) of the receipt of the comments
of the SEC, (ii) of any request by the SEC for amendments or supplements to the
Registration Statement, (iii) of the time when the Registration Statement has
become effective or any supplement or amendment has been filed, or the issuance
of any stop order and (iv) of the suspension of the qualification of the Cardia
Common Stock issuable in connection with the Merger for offering or sale in any
jurisdiction and shall supply VLS with copies of all correspondence with the SEC
with respect to the Registration Statement.
(d) If at any time prior to the Effective Time, any event or
circumstance relating to VLS or VLS' officers or directors should occur and be
discovered by VLS that is required to be described in an amendment or supplement
to the definitive Proxy Statement/Prospectus or the Registration Statement, VLS
shall promptly inform Cardia. If at any time prior to the Effective Time, any
event or circumstance relating to Cardia or any of its subsidiaries or their
respective officers or directors should occur and be discovered by Cardia that
is required to be described in an amendment or supplement to the definitive
Proxy Statement/Prospectus or the Registration Statement, Cardia shall promptly
inform VLS. Whenever any event occurs that should be described in an amendment
of, or supplement to, the definitive Proxy Statement/Prospectus or the
Registration Statement, VLS or Cardia, as the case may be, shall, upon learning
of such event, promptly notify the other and consult and cooperate with the
other in connection with the preparation of a mutually acceptable amendment or
supplement. The parties shall promptly file such amendment or supplement with
the SEC and mail such amendment or supplement as soon as practicable after it is
cleared by the SEC. No amendment or supplement to the Proxy Statement/Prospectus
or the Registration Statement will be made by Cardia or VLS without the approval
of the other party (such approval not to be unreasonably withheld or delayed).
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5.6 CONSENTS. VLS will, at its cost and expense, use commercially
reasonable efforts to obtain all material approvals and consents of all third
parties necessary on the part of VLS to consummate the transactions contemplated
hereby. Cardia will, at its cost and expense, use commercially reasonable
efforts to obtain all material approvals and consents of all third parties
necessary on the part of Cardia to consummate the transactions contemplated
hereby. VLS and Cardia agree to cooperate with each other in connection with
obtaining such approvals and consents.
5.7 EXPENSES. Whether or not the Merger is consummated, all costs and
expenses incurred in connection with this Agreement, the transactions
contemplated hereby, the Proxy Statement/Prospectus, and the Registration
Statement will be paid by the party incurring such costs and expenses, except
that VLS and Cardia will share equally the cost of printing and filing with the
SEC the Proxy Statement/Prospectus and the Registration Statement.
5.8 FURTHER ACTIONS. Subject to the terms and conditions herein
provided and without being required to waive any conditions herein (whether
absolute, discretionary, or otherwise), each of the parties hereto agrees to use
commercially reasonable efforts to take, or cause to be taken, all action, and
to do, or cause to be done, all things necessary, proper, or advisable to
consummate and make effective the transactions contemplated by this Agreement.
In case at any time after the Effective Time any further action is necessary or
desirable to carry out the purposes of this Agreement, the proper officers and
directors of each party to this Agreement shall take all such necessary action.
5.9 CERTAIN NOTIFICATIONS. VLS shall promptly notify Cardia in writing
of the occurrence of any event that will or could reasonably be expected to
result in the failure by VLS to satisfy any of the conditions specified in
Article 6. Cardia shall promptly notify VLS in writing of the occurrence of any
event that will or could reasonably be expected to result in the failure by
Cardia to satisfy any of the conditions specified in Article 6.
5.10 OTC TRADING. Following the Merger, Cardia will use commercially
reasonable efforts to cause the Cardia Common Stock to be quoted in the "pink
sheets" and approved for trading on the local over-the-counter market.
ARTICLE 6
CLOSING CONDITIONS
6.1 CONDITIONS TO OBLIGATIONS OF CARDIA AND VLS. The respective
obligations of each party to consummate the Merger shall be subject to the
fulfillment at or prior to the Closing of the following conditions, any or all
of which may be waived, in whole or in part, to the extent permitted by
applicable law:
(a) NO INJUNCTION. Neither Cardia nor VLS shall be subject to any final
order, decree, or injunction of a court of competent jurisdiction within the
United States that is then in effect that has the effect of making the Merger
illegal or otherwise prohibiting the consummation of the Merger.
(b) STOCKHOLDER APPROVAL. The Required VLS Stockholder Vote shall have
been obtained, in accordance with the MBCA and VLS' Articles of Incorporation
and Bylaws.
(c) REGISTRATION STATEMENT. The Registration Statement (as amended or
supplemented) shall have become effective under the 1933 Act and shall not be
subject to any "stop order," and no action, suit, proceeding, or investigation
by the SEC to suspend the effectiveness thereof shall have been initiated and be
continuing.
(d) BLUE SKY LAWS. Cardia shall have received all permits or other
authorizations required under
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applicable state blue sky laws for the issuance of shares of Cardia Common Stock
pursuant to the Merger.
(e) THIRD-PARTY CONSENTS. All approvals and consents of third parties
referred to in Section 5.6 shall have been obtained.
6.2 CONDITIONS TO OBLIGATIONS OF CARDIA. The obligations of Cardia to
consummate the Merger shall be subject to the fulfillment at or prior to the
Closing of the following additional conditions, any or all of which may be
waived by Cardia, in whole or in part, to the extent permitted by applicable
law:
(a) REPRESENTATIONS AND WARRANTIES TRUE. Each representation and
warranty of VLS contained in this Agreement shall be true and correct on the
Closing Date as though such representations and warranties were made on such
date, except that those representations and warranties that address matters only
as of the date hereof or another particular date shall remain true and correct
as of such date, and except in any case for any inaccuracies that have not had a
VLS Material Adverse Effect. Cardia shall have received a certificate to the
foregoing effect signed by the Chief Executive Officer of VLS or other
authorized officer of VLS reasonably satisfactory to Cardia.
(b) PERFORMANCE. VLS shall have performed and complied in all material
respects with all covenants required by this Agreement to be performed or
complied with by it at or prior to the Closing, and Cardia shall have received a
certificate to such effect signed by the Chief Executive Officer of VLS or other
authorized officer of VLS reasonably satisfactory to Cardia.
(c) LEGAL OPINION. Cardia shall have received an opinion of Duckson &
Carlson LLC as to the matters set forth on EXHIBIT A.
6.3 CONDITIONS TO OBLIGATIONS OF VLS. The obligation of VLS to
consummate the Merger shall be subject to the fulfillment at or prior to the
Closing of the following additional conditions, any or all of which may be
waived by VLS, in whole or in part, to the extent permitted by applicable law:
(a) REPRESENTATIONS AND WARRANTIES TRUE. Each representation and
warranty of Cardia contained in this Agreement shall be true and correct on the
Closing Date as though such representations and warranties were made on such
date, except that those representations and warranties that address matters only
as of the date hereof or another particular date shall remain true and correct
as of such date, and except in any case for any inaccuracies that have not had,
or would not reasonably be expected to have a Cardia Material Adverse Effect.
VLS shall have received a certificate to the foregoing effect signed by the
Chief Executive Officer or other authorized officer of Cardia reasonably
satisfactory to VLS.
(b) PERFORMANCE. Cardia shall have performed and complied in all
material respects with all material covenants required by this Agreement to be
performed or complied with by it at or prior to the Closing, and VLS shall have
received a certificate to such effect signed by the Chief Executive Officer or
other authorized officer of Cardia reasonably satisfactory to VLS.
(c) LEGAL OPINION. VLS shall have received an opinion of Lindquist &
Vennum P.L.L.P. as to the matters set forth on EXHIBIT B.
ARTICLE 7
TERMINATION AND ABANDONMENT
7.1 TERMINATION. This Agreement may be terminated at any time prior to
the Effective Time, whether before or after approval by the stockholders of VLS,
only:
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(a) by mutual written consent duly authorized by the Board of Directors
of Cardia and the Board of Directors of VLS;
(b) by either Cardia or VLS if a court of competent jurisdiction or an
administrative, governmental, or regulatory authority has issued a final
nonappealable order, decree, or ruling, or taken any other action, having the
effect of permanently restraining, enjoining, or otherwise prohibiting the
Merger;
(c) by either Cardia or VLS if, at the VLS Stockholder's Meeting, the
requisite vote of the stockholders of VLS for approval and adoption of this
Agreement and the Merger is not obtained, except that the right to terminate
this Agreement under this Section 7.1(c) will not be available to any party
whose failure to perform any material obligation under this Agreement has been
the proximate cause of, or resulted in, the failure to obtain the requisite vote
of the stockholders of VLS;
(d) by Cardia if either (i) VLS has breached its obligations under
Section 5.3 in any material respect, (ii) the Board of Directors of VLS has
recommended, approved, or authorized VLS' acceptance or execution of a letter of
intent or definitive agreement providing for an Alternative Transaction, as
defined in Section 5.3, (iii) the Board of Directors of VLS has modified in a
manner materially adverse to Cardia, or withdrawn, its recommendation of this
Agreement or (iv) a tender offer or exchange offer for any outstanding shares of
VLS Common Stock is commenced, and the Board of Directors of VLS, within ten
(10) business days after such tender offer or exchange offer is so commenced,
either fails to recommend against acceptance of such tender offer or exchange
offer by its stockholders or takes no position with respect to the acceptance of
such tender offer or exchange offer by its stockholders;
(e) by VLS or Cardia prior to the Required VLS Stockholder Vote if (i)
the Board of Directors of VLS has complied with, and continues to comply with,
all requirements and procedures of Section 5.3 in all material respects and has
authorized, subject to complying with the terms of this Agreement, VLS to enter
into a letter of intent or binding written agreement concerning a transaction
that constitutes a Superior Proposal and VLS notifies Cardia in writing that it
intends to enter into such agreement, attaching the most current version of such
agreement to such notice, (ii) Cardia does not make, within ten (10) business
days after receipt of VLS' written notice of its intention to enter into a
letter of intent or binding agreement for a Superior Proposal, any offer that
the Board of Directors of VLS reasonably and in good faith determines, after
consultation with its financial and legal advisors, is at least as favorable to
the stockholders of VLS as the Superior Proposal and during such ten business-
day period VLS reasonably considers and discusses in good faith all proposals
submitted by Cardia and, without limiting the foregoing, meets with, and causes
its financial advisors and legal advisors to meet with, Cardia and its advisors
from time to time as requested by Cardia to reasonably consider and discuss in
good faith Cardia's proposals;
(f) by Cardia if (i) Cardia is not in material breach of its
obligations under this Agreement and (ii) there has been a material breach by
VLS of any of its representations, warranties, or obligations under this
Agreement such that the conditions in Section 6.2 will not be satisfied
("Terminating VLS Breach"); provided, however, that, if such Terminating VLS
Breach is curable by VLS through the exercise of reasonable efforts, then for so
long as VLS continues to exercise reasonable efforts, Cardia may not terminate
this Agreement under this Section 7.1(f); or
(g) by VLS if (i) VLS is not in material breach of its obligations
under this Agreement and (ii) there has been a material breach by Cardia of any
of its representations, warranties, or obligations under this Agreement such
that the conditions in Section 6.3 will not be satisfied ("Terminating Cardia
Breach"); provided, however, that, if such Terminating Cardia Breach is curable
by Cardia through the exercise of commercially reasonable efforts, then for so
long as Cardia continues to exercise commercially reasonable efforts, VLS may
not terminate this Agreement under this Section 7.1(g).
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ARTICLE 8
MISCELLANEOUS
8.1 AMENDMENT AND MODIFICATION. Subject to applicable law, this
Agreement may be amended, modified, or supplemented only by written agreement of
Cardia and VLS at any time prior to the Effective Time with respect to any of
the terms contained herein; provided, however, that, after the approval of this
Agreement by the stockholders of VLS, no amendment may be made which would
reduce the amount or change the type of consideration into which each share of
VLS Common Stock shall be converted upon consummation of the Merger or which
would otherwise require stockholder approval under applicable law unless such
stockholder approval shall have been obtained.
8.2 WAIVER OF COMPLIANCE; CONSENTS. Any failure of Cardia or VLS to
comply with any obligation, covenant, agreement, or condition herein may be
waived by VLS or Cardia, respectively, only by a written instrument signed by an
officer of the party granting such waiver, but such waiver or failure to insist
upon strict compliance with such obligation, covenant, agreement, or condition
shall not operate as a waiver of, or estoppel with respect to, any subsequent or
other failure. Whenever this Agreement requires or permits consent by or on
behalf of any party hereto, such consent shall be given in writing.
8.3 INVESTIGATION; SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The
respective representations and warranties of Cardia and VLS contained herein or
in any certificates or other documents delivered prior to or at the Closing
shall not be deemed waived or otherwise affected by any investigation made by
any party hereto. The representations, warranties and agreements in this
Agreement and in any certificate delivered pursuant hereto shall terminate at
the Effective Time, except that the agreements set forth in Article 1 and
Sections 5.5(b), 5.6, 5.8, 5.9, 5.10, and this Article 8 shall survive the
Effective Time.
8.4 NOTICES. All notices and other communications hereunder shall be in
writing and shall be deemed given when delivered personally by commercial
courier service or otherwise, or by facsimile, or three days after such notice
is mailed by registered or certified mail (return receipt requested) to the
parties at the following addresses (or at such other address for a party as
shall be specified by like notice):
(a) If to Cardia, to it at:
Cardia, Inc.
13754 Frontier Court
Burnsville, MN 55337
Attention: Joseph A. Marino
FAX: (612) 997-2200
with a copy to:
Lindquist & Vennum P.L.L.P.
4200 IDS Center
80 South 8th Street
Minneapolis, MN 55402
Attention: Patrick Delaney
FAX: (612) 371-3207
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(b) If to VLS, to it at:
Electro Sensors
6111 Blue Circle Drive
Minnetonka, MN 55343-9108
Attention: Peter R. Peterson
FAX: (612) 930-0130
with a copy to:
Duckson & Carlson LLC
10 South 5th Street, Suite 300
Minneapolis, MN 55402
Attention: Todd Bassinger, Esq.
FAX: (612) 317-9746
8.5 ASSIGNMENT. This Agreement and all of the provisions hereof shall
be binding upon and inure to the benefit of the parties hereto and their
respective successors and permitted assigns, but neither this Agreement nor any
of the rights, interests, or obligations hereunder shall be assigned by any of
the parties hereto without the prior written consent of the other parties.
Except for the provisions of Article 1 (the "Third Party Provisions"), this
Agreement is not intended to confer upon any other person, except the parties
hereto, any rights or remedies hereunder, and no third person shall be a third
party beneficiary of this Agreement. The Third Party Provisions may be enforced
by the beneficiaries thereof.
8.6 GOVERNING LAW. This Agreement shall be governed by the substantive
laws of the State of Minnesota (regardless of the laws that might otherwise
govern under applicable Minnesota principles of conflicts of law). The parties
hereby (i) agree and consent to be subject to the jurisdiction of any state or
federal court in the state of Minnesota with respect to all actions and
proceedings arising out of or relating to this Agreement; (ii) agree that all
claims with respect to any such action or proceeding may be heard and determined
in such court; (iii) irrevocably waive any defense of an inconvenient forum to
the maintenance of any action or proceeding in such court; (iv) consent to
service of process by mailing or delivering such service to the party at its
respective principal business address; and (v) agree that a final judgment in
any such action or proceeding from which there is no further appeal shall be
conclusive and may be enforced in any other jurisdiction by suit on the judgment
or in any manner provided by law.
8.7 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, and all of which
together shall constitute one and the same instrument.
8.8 KNOWLEDGE. As used in this Agreement or the instruments,
certificates or other documents required hereunder, the term "knowledge" of a
party hereto shall mean actual knowledge of the directors or executive officers
of such party.
8.9 INTERPRETATION. The Table of Contents, Article and Section headings
contained in this Agreement are inserted for reference purposes only and shall
not affect the meaning or interpretation of this Agreement. This Agreement shall
be construed without regard to any presumption or other rule requiring the
resolution of any ambiguity regarding the interpretation or construction hereof
against the party causing this Agreement to be drafted.
8.10 PUBLICITY. Upon execution of this Agreement by Cardia and VLS, the
parties shall jointly issue a press release, as agreed upon by them. The parties
intend that all future statements or communications to the public or press
regarding this Agreement or the Merger will be mutually agreed upon by them.
Neither party shall,
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without such mutual agreement or the prior consent of the other, issue any
statement or communication to the public or to the press regarding this
Agreement, or any of the terms, conditions, or other matters with respect to
this Agreement, except as required by law or the rules of the SEC or the NASD
and then only (a) upon the advice of such party's legal counsel; (b) to the
extent required by law or the rules of the SEC or the NASD; and (c) following
prior notice to, and consultation with, the other party (which notice shall
include a copy of the proposed statement or communication to be issued to the
press or public). The foregoing shall not restrict Cardia's or VLS'
communications with their employees or customers in the ordinary course of
business. Each party shall exercise in good faith all reasonable efforts to
agree with the other party regarding the nature, form and extent of such
disclosure.
8.11 ENTIRE AGREEMENT. This Agreement, including the exhibits and
schedules hereto and the Confidentiality Agreement referred to herein, embodies
the entire agreement and understanding of the parties hereto in respect of the
subject matter contained herein. This Agreement and the Confidentiality
Agreement supersede all prior agreements and the understandings between the
parties with respect to such subject matter, whether written or oral.
8.12 SEVERABILITY. If any term or other provision of this Agreement is
invalid, illegal or incapable of being enforced by any rule of law or public
policy, all other conditions and provisions of this Agreement shall nevertheless
remain in full force and effect so long as the economic or legal substance of
the transactions contemplated by this Agreement is not affected in any manner
materially adverse to any party. Upon such determination that any term or other
provision is invalid, illegal or incapable of being enforced, the parties hereto
shall negotiate in
[REMAINDER OF PAGE LEFT INTENTIONALLY BLANK]
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good faith to modify this Agreement so as to effect the original intent of the
parties as closely as possible in a mutually acceptable manner in order that the
transactions contemplated by this Agreement be consummated as originally
contemplated to the fullest extent possible.
8.13 SPECIFIC PERFORMANCE. The parties hereto agree that irreparable
damage would occur in the event any provision of this Agreement was not
performed in accordance with the terms hereof and that the parties shall be
entitled to specific performance of the terms hereof, in addition to any other
remedy at law or in equity.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement and
Plan of Merger as of the date first above written.
CARDIA, INC.
By: /s/ Joseph A. Marino
-------------------------------------
Joseph A. Marino, Chairman and
Chief Executive Officer
VIDEO LEARNING SYSTEMS, INC.
By: /s/ Peter R. Peterson
-------------------------------------
Peter R. Peterson, President
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APPENDIX B
M.S. ss. 302A.471
MINNESOTA STATUTES
CORPORATIONS
CHAPTER 302A. BUSINESS CORPORATIONS
SHARES; SHAREHOLDERS
302A.471. RIGHTS OF DISSENTING SHAREHOLDERS
SUBDIVISION 1. ACTIONS CREATING RIGHTS. A shareholder of a corporation
may dissent from, and obtain payment for the fair value of the shareholder's
shares in the event of, any of the following corporate actions:
(a) An amendment of the articles that materially and adversely affects
the rights or preferences of the shares of the dissenting shareholder in that
it:
(1) alters or abolishes a preferential right of the shares;
(2) creates, alters, or abolishes a right in respect of the redemption
of the shares, including a provision respecting a sinking fund for the
redemption or repurchase of the shares;
(3) alters or abolishes a preemptive right of the holder of the shares
to acquire shares, securities other than shares, or rights to purchase shares or
securities other than shares;
(4) excludes or limits the right of a shareholder to vote on a matter,
or to cumulate votes, except as the right may be excluded or limited through the
authorization or issuance of securities of an existing or new class or series
with similar or different voting rights; except that an amendment to the
articles of an issuing public corporation that provides that section 302A.671
does not apply to a control share acquisition does not give rise to the right to
obtain payment under this section;
(b) A sale, lease, transfer, or other disposition of all or
substantially all of the property and assets of the corporation, but not
including a transaction permitted without shareholder approval in section
302A.661, subdivision 1, or a disposition in dissolution described in section
302A.725, subdivision 2, or a disposition pursuant to an order of a court, or a
disposition for cash on terms requiring that all or substantially all of the net
proceeds of disposition be distributed to the shareholders in accordance with
their respective interests within one year after the date of disposition;
(c) A plan of merger, whether under this chapter or under chapter 322B,
to which the corporation is a party, except as provided in subdivision 3;
(d) A plan of exchange, whether under this chapter or under chapter
322B, to which the corporation is a party as the corporation whose shares will
be acquired by the acquiring corporation, if the shares of the shareholder are
entitled to be voted on the plan; or
(e) Any other corporate action taken pursuant to a shareholder vote
with respect to which the articles, the bylaws, or a resolution approved by the
board directs that dissenting shareholders may obtain payment for their shares.
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SUBD. 2. BENEFICIAL OWNERS. (a) A shareholder shall not assert
dissenters' rights as to less than all of the shares registered in the name of
the shareholder, unless the shareholder dissents with respect to all the shares
that are beneficially owned by another person but registered in the name of the
shareholder and discloses the name and address of each beneficial owner on whose
behalf the shareholder dissents. In that event, the rights of the dissenter
shall be determined as if the shares as to which the shareholder has dissented
and the other shares were registered in the names of different shareholders.
(b) The beneficial owner of shares who is not the shareholder may
assert dissenters' rights with respect to shares held on behalf of the
beneficial owner, and shall be treated as a dissenting shareholder under the
terms of this section and section 302A.473, if the beneficial owner submits to
the corporation at the time of or before the assertion of the rights a written
consent of the shareholder.
SUBD. 3. RIGHTS NOT TO APPLY. (a) Unless the articles, the bylaws, or a
resolution approved by the board otherwise provide, the right to obtain payment
under this section does not apply to a shareholder of the surviving corporation
in a merger, if the shares of the shareholder are not entitled to be voted on
the merger.
(b) If a date is fixed according to section 302A.445, subdivision 1,
for the determination of shareholders entitled to receive notice of and to vote
on an action described in subdivision 1, only shareholders as of the date fixed,
and beneficial owners as of the date fixed who hold through shareholders, as
provided in subdivision 2, may exercise dissenters' rights.
SUBD. 4. OTHER RIGHTS. The shareholders of a corporation who have a
right under this section to obtain payment for their shares do not have a right
at law or in equity to have a corporate action described in subdivision 1 set
aside or rescinded, except when the corporate action is fraudulent with regard
to the complaining shareholder or the corporation.
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M.S. SS. 302A.473
MINNESOTA STATUTES
CORPORATIONS
CHAPTER 302A. BUSINESS CORPORATIONS
SHARES; SHAREHOLDERS
302A.473. PROCEDURES FOR ASSERTING DISSENTERS' RIGHTS
SUBDIVISION 1. DEFINITIONS. (a) For purposes of this section, the terms
defined in this subdivision have the meanings given them.
(b) "Corporation" means the issuer of the shares held by a dissenter
before the corporate action referred to in section 302A.471, subdivision 1 or
the successor by merger of that issuer.
(c) "Fair value of the shares" means the value of the shares of a
corporation immediately before the effective date of the corporate action
referred to in section 302A.471, subdivision 1.
(d) "Interest" means interest commencing five days after the effective
date of the corporate action referred to in section 302A.471, subdivision 1, up
to and including the date of payment, calculated at the rate provided in section
549.09 for interest on verdicts and judgments.
SUBD. 2. NOTICE OF ACTION. If a corporation calls a shareholder meeting
at which any action described in section 302A.471, subdivision 1 is to be voted
upon, the notice of the meeting shall inform each shareholder of the right to
dissent and shall include a copy of section 302A.471 and this section and a
brief description of the procedure to be followed under these sections.
SUBD. 3. NOTICE OF DISSENT. If the proposed action must be approved by
the shareholders, a shareholder who is entitled to dissent under section
302A.471 and who wishes to exercise dissenters' rights must file with the
corporation before the vote on the proposed action a written notice of intent to
demand the fair value of the shares owned by the shareholder and must not vote
the shares in favor of the proposed action.
SUBD. 4. NOTICE OF PROCEDURE; DEPOSIT OF SHARES. (a) After the proposed
action has been approved by the board and, if necessary, the shareholders, the
corporation shall send to all shareholders who have complied with subdivision 3
and to all shareholders entitled to dissent if no shareholder vote was required,
a notice that contains:
(1) The address to which a demand for payment and certificates of
certificated shares must be sent in order to obtain payment and the date by
which they must be received;
(2) Any restrictions on transfer of uncertificated shares that will
apply after the demand for payment is received;
(3) A form to be used to certify the date on which the shareholder, or
the beneficial owner on whose behalf the shareholder dissents, acquired the
shares or an interest in them and to demand payment; and
(4) A copy of section 302A.471 and this section and a brief description
of the procedures to be followed under these sections.
(b) In order to receive the fair value of the shares, a dissenting
shareholder must demand payment and deposit certificated shares or comply with
any restrictions on transfer of uncertificated shares within 30 days after
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the notice required by paragraph (a) was given, but the dissenter retains all
other rights of a shareholder until the proposed action takes effect.
SUBD. 5. PAYMENT; RETURN OF SHARES. (a) After the corporate action
takes effect, or after the corporation receives a valid demand for payment,
whichever is later, the corporation shall remit to each dissenting shareholder
who has complied with subdivisions 3 and 4 the amount the corporation estimates
to be the fair value of the shares, plus interest, accompanied by:
(1) The corporation's closing balance sheet and statement of income for
a fiscal year ending not more than 16 months before the effective date of the
corporate action, together with the latest available interim financial
statements;
(2) An estimate by the corporation of the fair value of the shares and
a brief description of the method used to reach the estimate; and
(3) A copy of section 302A.471 and this section, and a brief
description of the procedure to be followed in demanding supplemental payment.
(b) The corporation may withhold the remittance described in paragraph
(a) from a person who was not a shareholder on the date the action dissented
from was first announced to the public or who is dissenting on behalf of a
person who was not a beneficial owner on that date. If the dissenter has
complied with subdivisions 3 and 4, the corporation shall forward to the
dissenter the materials described in paragraph (a), a statement of the reason
for withholding the remittance, and an offer to pay to the dissenter the amount
listed in the materials if the dissenter agrees to accept that amount in full
satisfaction. The dissenter may decline the offer and demand payment under
subdivision 6. Failure to do so entitles the dissenter only to the amount
offered. If the dissenter makes demand, subdivisions 7 and 8 apply.
(c) If the corporation fails to remit payment within 60 days of the
deposit of certificates or the imposition of transfer restrictions on
uncertificated shares, it shall return all deposited certificates and cancel all
transfer restrictions. However, the corporation may again give notice under
subdivision 4 and require deposit or restrict transfer at a later time.
SUBD. 6. SUPPLEMENTAL PAYMENT; DEMAND. If a dissenter believes that the
amount remitted under subdivision 5 is less than the fair value of the shares
plus interest, the dissenter may give written notice to the corporation of the
dissenter's own estimate of the fair value of the shares, plus interest, within
30 days after the corporation mails the remittance under subdivision 5, and
demand payment of the difference. Otherwise, a dissenter is entitled only to the
amount remitted by the corporation.
SUBD. 7. PETITION; DETERMINATION. If the corporation receives a demand
under subdivision 6, it shall, within 60 days after receiving the demand, either
pay to the dissenter the amount demanded or agreed to by the dissenter after
discussion with the corporation or file in court a petition requesting that the
court determine the fair value of the shares, plus interest. The petition shall
be filed in the county in which the registered office of the corporation is
located, except that a surviving foreign corporation that receives a demand
relating to the shares of a constituent domestic corporation shall file the
petition in the county in this state in which the last registered office of the
constituent corporation was located. The petition shall name as parties all
dissenters who have demanded payment under subdivision 6 and who have not
reached agreement with the corporation. The corporation shall, after filing the
petition, serve all parties with a summons and copy of the petition under the
rules of civil procedure. Nonresidents of this state may be served by registered
or certified mail or by publication as provided by law. Except as otherwise
provided, the rules of civil procedure apply to this proceeding. The
jurisdiction of the court is plenary and exclusive. The court may appoint
appraisers, with powers and authorities the court deems proper, to receive
evidence on and recommend the amount of the fair value of the shares. The court
shall determine whether
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the shareholder or shareholders in question have fully complied with the
requirements of this section, and shall determine the fair value of the shares,
taking into account any and all factors the court finds relevant, computed by
any method or combination of methods that the court, in its discretion, sees fit
to use, whether or not used by the corporation or by a dissenter. The fair value
of the shares as determined by the court is binding on all shareholders,
wherever located. A dissenter is entitled to judgment in cash for the amount by
which the fair value of the shares as determined by the court, plus interest,
exceeds the amount, if any, remitted under subdivision 5, but shall not be
liable to the corporation for the amount, if any, by which the amount, if any,
remitted to the dissenter under subdivision 5 exceeds the fair value of the
shares as determined by the court, plus interest.
SUBD. 8. COSTS; FEES; EXPENSES. (a) The court shall determine the costs
and expenses of a proceeding under subdivision 7, including the reasonable
expenses and compensation of any appraisers appointed by the court, and shall
assess those costs and expenses against the corporation, except that the court
may assess part or all of those costs and expenses against a dissenter whose
action in demanding payment under subdivision 6 is found to be arbitrary,
vexatious, or not in good faith.
(b) If the court finds that the corporation has failed to comply
substantially with this section, the court may assess all fees and expenses of
any experts or attorneys as the court deems equitable. These fees and expenses
may also be assessed against a person who has acted arbitrarily, vexatiously, or
not in good faith in bringing the proceeding, and may be awarded to a party
injured by those actions.
(c) The court may award, in its discretion, fees and expenses to an
attorney for the dissenters out of the amount awarded to the dissenters, if any.
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PART II
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 302A.521 of Minnesota Statutes requires the Registrant to
indemnify a person made or threatened to be made a party to a proceeding by
reason of the former or present official capacity of the person with respect to
the Registrant, against judgments, penalties, fines, including reasonable
expenses, if such person (1) has not been indemnified by another organization or
employee benefit plan for the same judgments, penalties, fines, including,
without limitation, excise taxes assessed against the person with respect to an
employee benefit plan, settlements, and reasonable expenses, including
attorneys' fees and disbursements, incurred by the person in connection with the
proceeding with respect to the same acts or omissions; (2) acted in good faith;
(3) received no improper personal benefit, and statutory procedure has been
followed in the case of any conflict of interest by a director; (4) in the case
of a criminal proceeding, had no reasonable cause to believe the conduct was
unlawful; and (5) in the case of acts or omissions occurring in the person's
performance in the official capacity of director or, for a person not a
director, in the official capacity of officer, committee member or employee,
reasonably believed that the conduct was in the best interests of the
Registrant, or, in the case of performance by a director, officer or employee of
the Registrant as a director, officer, partner, trustee, employee or agent of
another organization or employee benefit plan, reasonably believed that the
conduct was not opposed to the best interests of the Registrant. In addition,
Section 302A.521, subd. 3, requires payment by the Registrant, upon written
request, of reasonable expenses in advance of final disposition in certain
instances. A decision as to required indemnification is made by a disinterested
majority of the Board of Directors present at a meeting at which a disinterested
quorum is present, or by a designated committee of the Board, by special legal
counsel, by the shareholders or by a court. The Registrant's Bylaws provide for
indemnification of officers, directors and employees to the fullest extent
provided by the Minnesota Business Corporation Act, as it may be amended from
time to time.
As permitted by Section 302A.251 of the Minnesota Business Corporation
Act, the Articles of Incorporation of the Registrant eliminate the liability of
the directors of the Registrant for monetary damages arising from any breach of
fiduciary duties as a member of the Registrant's Board of Directors, except for
liability (a) for any breach of the director's duty of loyalty to the Registrant
or its shareholders; (b) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law; (c) under Sections
302A.559 or 80A.23 of the Minnesota Statutes; (d) for any transaction from which
a director derived an improper personal benefit; or (e) for any act or omission
that occurred prior to the adoption of these provisions in the Registrant's
Articles of Incorporation.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(1) Exhibits:
Exhibit
Number Description of Exhibits
------ -----------------------
2.1 Agreement and Plan of Reorganization dated July 1, 1999
between Cardia, Inc. and Video Learning Systems, Inc.
(included as Appendix A to the Prospectus/Proxy Statement in
this Registration Statement).
3.1 Articles of Incorporation of Cardia, Inc. (filed with the
Registrant's Registration Statement No. 333-68187 on Form SB-2
(hereinafter, the "SB-2 Registration Statement") and
incorporated herein by reference).
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3.2 Bylaws of Cardia, Inc. (filed with the Registrant's SB-2
Registration Statement and incorporated herein by reference).
*4.1 See Exhibit Nos. 3.1 and 3.2.
*5.1 Opinion of Lindquist & Vennum P.L.L.P.
*23.1 Consent of PricewaterhouseCoopers LLP.
*23.2 Consent of Casey, Menden, Faust & Nelson, P.A.
*23.3 Consent of Lindquist & Vennum P.L.L.P. (set forth in Exhibit
5.1).
*27.1 Financial Data Schedule.
- --------------------------
* Filed herewith.
(2) Financial Statement Schedules:
Except as otherwise set forth herein, all financial statement schedules
have been omitted because they are not applicable or the required information is
included in the financial statements or notes thereto previously filed as part
of the Registrant's Annual Report on Form 10-KSB for the year ended December 31,
1998 and Quarterly Report on Form 10-QSB for the quarter ended March 31, 1999,
each previously filed with the Commission.
The Registrant's financial data schedule for the six-months ended June
30, 1999 is filed herewith.
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ITEM 22. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration
Statement:
(i) To include any prospectus required in Section 10(a)
(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the Registration
Statement (or the most recent post-effective
amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the
information set forth in the Registration Statement;
(iii) To include any material information with respect to
the plan of distribution not previously disclosed in
the Registration Statement or any material change to
such information in the Registration Statement;
provided, however, that paragraphs (1) (i) and (1) (ii) do not
apply if the information required to be included in a
post-effective amendment by those paragraphs is contained in
periodic reports filed by the Registrant pursuant to section
13 or section 15(d) of the Securities Exchange Act of 1934
that are incorporated by reference in the Registration
Statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, 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;
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain
unsold at the termination of the offering;
(4) That, for purposes of determining any liability under the
Securities Act of 1933, each filing of the Registrant's annual
report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 that is incorporated by
reference in the Registration Statement 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;
(5) 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;
(6) 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;
II-3
<PAGE>
(7) That every prospectus (i) that is filed pursuant to paragraph
(6) 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;
and
(8) To supply by means of a post-effective amendment all
information concerning a transaction, and the company being
acquired involved therein, that was not the subject of and
included in the Registration Statement when it became
effective.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the provisions described under Item 20 above, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the 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 Act and will
be governed by the final adjudication of such issue.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange 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 City of
Burnsville and the State of Minnesota on this 9th day of August, 1999.
CARDIA, INC.
By: /s/ Joseph A. Marino
------------------------------------------
Joseph A. Marino, Chief Executive Officer,
President, Treasurer and Chairman of the
Board of Directors
II-4
<PAGE>
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below on the 9th day of August, 1999, by
the following persons in the capacities indicated.
SIGNATURE TITLE
- --------- -----
/s/ Joseph A. Marino Chief Executive Officer, President,
- ----------------------------- Treasurer and Chairman of the Board of
Joseph A. Marino Directors and Director (principal executive
officer and principal financial and
accounting officer)
/s/ Thomas E. Brust Director
- -----------------------------
Thomas E. Brust
/s/ Christopher J. Turnbull Director
- -----------------------------
Christopher J. Turnbull
II-5
<PAGE>
EXHIBIT INDEX
5.1 Opinion of Lindquist & Vennum P.L.L.P. regarding legality of
securities.
23.1 Consent of PricewaterhouseCoopers LLP.
23.2 Consent of Casey, Menden, Faust & Nelson, P.A.
27.1 Financial Data Schedule.
OPINION OF LINDQUIST & VENNUM P.L.L.P
EXHIBIT 5.1
[LETTERHEAD]
_______, 1999
Cardia, Inc.
13754 Frontier Court
Burnsville, MN 55337
RE: REGISTRATION STATEMENT ON FORM S-4
Ladies and Gentlemen:
In connection with the Registration Statement on Form S-4 filed by
Cardia, Inc., (the "Company") with the Securities and Exchange Commission on
___________, 1999 relating to the registration of 200,000 shares of Common
Stock, $.01 par value (the "Shares"), to be issued by the Company in connection
with the proposed merger of Video Learning Systems, Inc., a Minnesota
corporation, with and into the Company, please be advised that as counsel to the
Company, upon examination of such corporate documents and records as we have
deemed necessary or advisable for the purposes of this opinion, it is our
opinion that:
1. The Company has been duly incorporated is validly existing and
in good standing under the laws of the State of Minnesota.
2. All necessary corporate action on the part of the Company has
been taken to authorize the issuance of the Shares to be
issued in connection with such merger and, when issued
pursuant to the merger and paid for as contemplated by the
Registration Statement, the Shares will be legally issued,
fully paid and nonassessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to our firm under the heading "Legal
Matters" in the prospectus/proxy statement comprising a part of the Registration
Statement.
Very truly yours,
/s/ LINDQUIST & VENNUM P.L.L.P.
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of
this Registration Statement on Form S-4 of Cardia, Inc. of our report dated
March 18, 1999, relating to the financial statements of Cardia, Inc., which
appears in such Registration Statement. We also consent to the reference to us
made under the heading "Independent Accountants."
/s/ PricewaterhouseCoopers LLP
PRICEWATERHOUSECOOPERS LLP
Minneapolis, Minnesota
August 9, 1999
EXHIBIT 23.2
We hereby consent to the use in the Prospectus constituting part of
this Registration Statement on Form S-4 of our report dated July 7, 1999,
relating to the financial statements of Video Learning Systems, Inc., which
appears in such Registration Statement and to all references to our firm
therein.
/s/ Casey, Menden, Faust & Nelson, P.A.
CASEY, MENDEN, FAUST & NELSON, P.A.
Bloomington, Minnesota
August 9, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 484,285
<SECURITIES> 0
<RECEIVABLES> 143,031
<ALLOWANCES> 0
<INVENTORY> 38,200
<CURRENT-ASSETS> 666,790
<PP&E> 104,143
<DEPRECIATION> (6,070)
<TOTAL-ASSETS> 845,931
<CURRENT-LIABILITIES> 22,271
<BONDS> 0
0
0
<COMMON> 10,000
<OTHER-SE> 2,334,667
<TOTAL-LIABILITY-AND-EQUITY> 845,931
<SALES> 444,003
<TOTAL-REVENUES> 444,003
<CGS> (128,011)
<TOTAL-COSTS> (128,011)
<OTHER-EXPENSES> (542,745)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (226,753)
<INCOME-TAX> (226,753)
<INCOME-CONTINUING> (226,753)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (226,753)
<EPS-BASIC> (0.33)
<EPS-DILUTED> (0.33)
</TABLE>
